Law Office of Jeff Whitehead» Uncategorized

Is Chapter 13 the Answer to my Student Loan Problem?

admin — Tue, 16 Feb 2010 04:58:18 +0000

Chapter 13 is a reorganization plan for consumers. In most cases, a student loan borrower will not be able to discharge their student loans in chapter 13. However, chapter 13 might still be an helpful option for some people. In chapter 13, the tables are turned on the student loan lender. Instead of trying to make the payment dictated by the lender, the consumer proposes a plan that fits his or her budget. Another advantage is that the consumer’s plan usually pays secured creditors (like cars notes and mortgage payments) and taxes before the student loans. While in bankruptcy, no collection action can be taken against the borrower. The consumer will still owe the remainder of the student loans at the end of the bankruptcy, but if the lender is unreasonable, chapter 13 can be a legitimate strategy for dealing with student loans.

I passed the means test! I can file Chapter 7 right??

admin — Sun, 14 Feb 2010 21:35:59 +0000

not so fast…

Most higher income individuals considering bankruptcy think that if you make less than the applicable means test figure then they are automatically eligible for chapter 7 relief. That’s not always true. The Bacardi case below was written by Judge Goldgar and released on January 6, 2010. In this case, even though the debtors were eligible for chapter 7 because they passed the means test (the Bacardis passed because of their high secured debt obligations), Judge Goldgar ruled that they failed the “totality of the circumstances” test stated in 707 (b)(3).

The Bacardis make more money than most people seeking chapter 7 relief (over $200,000 per year). Plus their housing expenses were over $6000 per month. Given these facts, Judge Goldgar determined that the Bacardis should be forced to repay at least some of their creditors in a chapter 11. In summary, the means test is sufficient in the vast majority of cases to determine whether or not a debtor is eligible for chapter 7 relief. However, high income debtors should be aware that they must also pass the totality of the circumstances test.

The opinion is below:

UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

In re: BRIAN E. BACARDI and JEAN M. BACARDI

Judge Goldgar

MEMORANDUM OPINION

This matter is before the court for ruling on the motion of the U.S. Trustee to

dismiss the chapter 7 case of debtors Brian and Jean Bacardi for abuse pursuant to

section 707(b)(3) of the Bankruptcy Code. The motion is well-taken. For the

reasons that follow, the Bacardis will be given 14 days to file a motion to convert

their case to chapter 11. If no motion is filed, the case will be dismissed.

1. Facts

The facts are taken from the Bacardis’ petition, schedules, and other filings

with the court, as well as from the parties’ memoranda. No facts are in dispute.

Brian Bacardi is a podiatrist with his own practice. The practice is a mobile

one: Dr. Bacardi sees patients in their homes. Jean Bacardi is a chemical engineer.

The Bacardis have three sons, ages 13, 12, and 8, and live in Hawthorn Woods,

Illinois.

The Bacardis together earn $18,000 per month, some $216,000 annually

before taxes. They own three properties: their current residence, a house on Deer

Point Drive in Hawthorn Woods, valued on the Bacardis’ amended Schedule A at

$790,000; a house on Squire Road in Hawthorn Woods valued at $500,000; and a

condominium in Fort Walton Beach, Florida, valued at $400,000. The mortgage

balances on each property currently exceed the property’s value – in the case of the

Deer Point Drive property, by almost $200,000. The monthly mortgage payment

and real estate taxes on the Squire Road property total $4,419. The monthly

mortgage payments and real estate taxes on the Deer Point Drive property where

the Bacardis now reside total $6,234. The monthly mortgage payments and

assessment on the Florida condo total $3,455, until August 2009 partially offset by

$1904 in monthly rental income.

The Bacardis lived in the Squire Road property from 1994 until 2006, when

they moved to the Deer Point Drive property. The Bacardis meant to sell the Squire

Road property in connection with the move but were unable to do so. For a time

they rented the property. Then, they used more than $250,000 in retirement funds

to pay the mortgages and other expenses not only on the Squire Road property but

on the Deer Point Drive property and the Florida condo. Once the Bacardis

exhausted their retirement funds, they used their credit cards to pay the mortgages

and expenses. Meanwhile, the collapse of the real estate market not only impaired

their ability to sell the Squire Road property but reduced the market values of all

the properties below the amounts the Bacardis owed on the mortgages.

On July 16, 2009, the Bacardis filed a chapter 13 bankruptcy case. Two

weeks later, the Bacardis converted the case to a case under chapter 7. (No reason

for the conversion has been given, but it appears the Bacardis were well over the

debt limit in section 109(e) for a chapter 13 case). The Bacardis’ amended schedules

filed on July 29, 2009, disclose the three real properties and the associated

mortgages as well as three vehicles (a 2002 Ford Explorer, a 2004 Ford Taurus, and

a 2006 Dodge Caravan.) According to amended Schedule D, the Bacardis have

about $2.1 million in secured debt, of which $436,000 exceeds the value of the

collateral. Amended Schedule E discloses $52,500 in priority unsecured debt

consisting of taxes owed to the IRS and the Lake County Treasurer. On amended

Schedule F, the Bacardis report $106,000 in nonpriority unsecured debt, most of it

credit card debt.

An amended Schedule J filed July 30, 2009, reflects, among others, the

following monthly expenses: $720 for heating, electricity, and home maintenance on

the Deer Point Drive property, $3,455 for mortgage payments and assessments on

the condominium, $115 for cable television, $130 for cell phone use, $500 for

“children’s sports activities,” and $75 for recreation. Schedule J also disclosed

$3,261 in monthly business expenses for Brian Bacardi’s practice. A separate

amended business income and expense statement broke those expenses down. They

included $718 for seminars and continuing education, $717 for billing, and $100 a

month for internet service.

The amended Form B22A filed on July 29, 2009, the means test form, showed

that the Bacardis passed the means test in section 707(b)(2), and their case did not

give rise to a presumption of abuse. The U.S. Trustee has not contested the

Bacardi’s calculations on the form and has not disputed that there is no

presumption of abuse.

On October 22, 2009, however, the U.S. Trustee filed a motion to dismiss the

Bacardis’ case under section 707(b)(3) of the Code. The U.S. Trustee argued that

given the Bacardis’ high income, a home the Trustee describes as a “luxury home on

a lake,” and many unreasonably high expenses (including expenses for a Florida

condo and certain of Brian Bacardi’s business expenses) made the case an abuse of

the provisions of chapter 7 under the “totality of the circumstances” in section

707(b)(3)(B), notwithstanding the results of the means test.

In response, the Bacardis explain how they inadvertently ended up with

three real properties on their hands. They note that they intend to surrender the

Squire Road property to foreclosure. And although they originally intended to

retain the Florida condo, they are now willing to surrender that property to

foreclosure as well.

In their response, the Bacardis concede that certain expenses (such as the

$500 for children’s sports activities and the cable television bill) are excessive.

Nevertheless, the Bacardis insist that with the surrender of the two properties and

the reduction of certain expenses, their case is not an abuse. In particular, they

argue, a revised Schedule J with hypothetical reductions in expenses would produce

only $129 in disposable income, making it impossible for them to pay any

meaningful amount to unsecured creditors or confirm a chapter 11 plan.

2. Discussion

This U.S. Trustee is correct that this case is an abuse of chapter 7. The

expenses that the U.S. Trustee identifies aside, the Bacardis are high income

debtors living in an expensive house although they have a considerably less

expensive house available to them. Surrendering the expensive house and

retaining the less expensive one would permit the Bacardis to make a substantial

payment to their unsecured creditors. Reducing some of the Bacardis’ other

expenses would permit an even more substantial payment.

Section 707(b)(1) of the Bankruptcy Code permits the dismissal of a chapter 7

debtor’s case if granting that debtor relief “would be an abuse of the provisions of

this chapter.” 11 U.S.C. § 707(b)(1). Under section 707(b)(2), the court must

“presume abuse” if a debtor fails the means test. Under section 707(b)(3), a court

may dismiss the case of a debtor who passes the means test, or who manages to

rebut the presumption of abuse under section 707(b)(2), if the debtor filed the

petition in bad faith or if “the totality of the circumstances . . . of the debtor’s

financial situation demonstrates abuse.” 11 U.S.C. § 707(b)(3)((A), (B); In re Ross-

Tousey, 549 F.3d 1148, 1161-62 (7th Cir. 2008).

“Totality of the circumstances,” a phrase that appeared in section 707(b) even

before BAPCPA’s 2005 revision of the Bankruptcy Code, is not defined, and the

Seventh Circuit has never addressed it. The post-BAPCPA structure of the statute,

however, gives some guidance to its meaning. Section 707(b)(2) creates an objective

test under which some cases are presumed abusive. Section 707(b)(3) then permits

dismissal even if a debtor passes the objective test, setting up a contrasting “totality

of the circumstances” test that requires a more subjective, holistic assessment of the

debtor and his circumstances. See In re Sullivan, 370 B.R. 314, 319 (Bankr. D.

Mont. 2007) (describing section 707(b)(3) as “subjective”); see also In re Haar, 373

B.R. 493, 499 (Bankr. N.D. Ohio 2007) (calling section 707(b)(3) an “equitable test”

as opposed to the “rigid, mechanical formula” in section 707(b)(2)).

In addition, the separate requirement in section 707(b)(3)(A) that the court

dismiss a case when the petition was filed in “bad faith” indicates that a case can be

dismissed for abuse under the “totality of the circumstances” test in (B) based solely

on ability to pay and without, for example, proof of misconduct on the debtor’s part.

In re Perelman, ___ B.R. ___, ___, 2009 WL 3490758, at *8 (Bankr. E.D.N.Y. Oct. 30,

2009). Some courts have held otherwise, see, e.g., In re Nockerts, 357 B.R. 497, 506-

8 (Bankr. E.D. Wis. 2006) (holding that “more than the ability to fund a chapter 13

plan” must be shown to dismiss a case under section 707(b)(3)(B)), but these courts

are a minority, see, e.g. In re Boule, 415 B.R. 1, 5 (Bankr. D. Mass. 2009) (declining

to follow Nockerts); see also In re Jensen, 407 B.R. 378, 383 (Bankr. C.D. Cal. 2009)

(same, and noting that “the majority of courts and commentators” disagree with

Nockerts); In re Parada, 391 B.R. 492, 498 (Bankr. S.D. Fla. 2008) (same).

Before BAPCPA, the courts of appeals in six circuits had interpreted “totality

of circumstances” by adopting open-ended, multi-factor tests. See Costello v.

Bodenstein, No. 01 C 9696, 2002 WL 1821663, at *3 (N.D. Ill. Aug. 7, 2002) (citing

cases). Except for the Fourth Circuit in In re Green, 934 F.2d 568 (4th Cir. 1991),

these courts agreed that the primary factor in determining what the pre-BAPCPA

version of the statute called “substantial abuse” (rather than merely “abuse”) was

the debtor’s ability to repay his debts. See Costello, 2002 WL 1821663, at *4. These

courts of appeals also concluded that an ability to repay debts standing alone could

be sufficient to warrant dismissal, although other factors might be relevant. Id.

Other relevant factors could include whether the debtor has a stable source of

future income, whether his expenses can be reduced significantly without depriving

him of adequate food, clothing, shelter and other necessities, whether the petition

was filed because of sudden illness calamity, disability or unemployment, whether

the debtor incurred cash advances and made consumer purchases far in excess of

his ability to pay, and whether the debtor’s schedules reasonably and accurately

reflect his true financial condition. See Green, 934 F.2d at 572; In re Krohn, 886

F.2d 123, 127 (6th Cir. 1989). The “totality of the circumstances” analysis is factintensive

and performed on a case-by-case basis. In re Stewart, 175 F.3d 796, 809

(10th Cir. 1999).

In this case, the Bacardis have the ability to pay creditors even with no

reduction in the expenses the U.S. Trustee deems excessive. The amended

Schedule J shows average monthly income of $16,273 and average monthly

expenses of $18,755, resulting in negative net monthly income of $2,482.57. But

these figures assume that the Bacardis will have the expenses (and the income)

associated with the Florida condo when in fact they have decided not to keep the

condo. More important, they assume the Bacardis will continue to live on their

Deer Point Drive property with its attendant monthly expenses of $6,234 and

surrender the Squire Road property.

If the Bacardis surrendered not only the condo but the Deer Point Drive

property and instead retained the Squire Road property, they could make a

significant payment to their unsecured creditors. Surrendering the condo would

reduce the Bacardis’ income to $14,368 and expenses to $15,300. Surrendering the

Deer Point Drive property rather than the Squire Road property would replace

$6,234 in monthly mortgage and tax payments with monthly mortgage and tax

payments of $4,419, reducing the Bacardis’ expenses another $1,815 to $13,485 and

giving the Bacardis positive monthly net income of $883 ($14,368 minus $13,485).

Sixty monthly payments of $883 would total $52,980. Taking just the additional

$550 reduction the Bacardis themselves propose in expenses for cable television and

sports activities would produce monthly net income of $1,433 which over sixty

months would total $85,980. See Boule, 415 B.R. at 8 (noting that $1,000 in excess

monthly income is a number “large enough to question” why a debtor “is not making

an attempt to pay something to her creditors”).

A debtor’s budget may be excessive or unreasonable because of high housing

expenses, including a high mortgage payment. See In re Crink, 402 B.R. 159, 171

(Bankr. M.D.N.C. 2009) (citing numerous cases for this proposition). In Crink, for

example, the court found the debtors’ housing expenses unreasonable because they

totaled 61% of the debtors’ budget and were devoted to a $478,000 house in which

the debtors had no equity. Id. The court noted that in considering whether housing

expenses are unreasonable, “due regard should be given to the size of the family,

their reasonable needs, and the cost of alternative housing,” id., but nevertheless

found the housing expenses showed abuse and justified dismissal, id. at 172.

In this case, the Bacardis’ housing expenses associated with the Deer Point

Drive property are likewise unreasonably high. The mortgage payment and real

estate taxes alone make up 40% of the Bacardis’ total expenses. If utilities and

maintenance are included, the expenses grow to $6,954, and the percentage of the

total increases to 45%. Not only are the Bacardis paying an excessive amount of

their income to live on Deer Point Drive, but they propose to continue making these

payments to retain an $800,000 property in which they do not remotely have any

equity.

Fortunately, the Bacardis have an alternative: the Squire Road property.

The Squire Road property is in the same municipality, Hawthorn Woods, and the

Bacardi family is no larger than it was in 2006, only three years ago, when the

Bacardis moved out. The Bacardis thus have no “longstanding, traditional ties to a

homestead” that might weigh in favor Deer Point Drive. Crink, 402 B.R. at 171.

Nor do the Bacardis offer any reason to keep the Deer Point Drive property, a

property that can fairly be termed a luxury item, In re Oot, 368 B.R. 662, 667

(Bankr. N.D. Ohio 2007) (finding that a $430,000 house with a $4,000 mortgage

payment “can only be categorized as a luxury item”), when the Squire Road

property is available. The cost of living at the Squire Road property is $1,815 less

per month than the cost of living at the Deer Point Drive property. Returning to

Squire Road, along with a little “good, old-fashioned belt-tightening,” Krohn, 886

F.2d at 128, would permit a substantial dividend to unsecured creditors. Fairness

to those creditors demands at least that much.

In opposing the U.S. Trustee’s motion, the Bacardis insist they will be able to

repay only a small percentage of their unsecured debt in a chapter 11 case. Not so.

Even if probable deficiency claims of $388,000 from the Florida condo and Deer

Point Drive property are added to the $158,500 in priority and nonpriority

unsecured debt shown on the Bacardis’ schedules, plan payments totaling $52,980

(the Bacardis’ disposable income over five years if the Deer Point Drive property is

surrendered and the Squire Road property retained) would repay 10% of the

Bacardis’ unsecured debt. Plan payments totaling $85,980 (the Bacardis’ disposable

income over five years if the Deer Point Drive property is surrendered and a few

additional expenses are reduced) would repay 16% of the Bacardis’ unsecured debt.

More important, the raw percentage of unsecured debt a debtor can

conceivably repay in a chapter 13 or chapter 11 case is not dispositive of abuse

under section 707(b)(3). If it were, a debtor could avoid dismissal for abuse simply

by incurring massive amounts of debt and reducing the percentage of his repayment

proportionally. See Boule, 415 B.R. at 7-8 (recognizing that the “amount of

unsecured debt and a potential dividend are inversely proportional so that debtors

with higher amounts of debt might skate around the totality of the circumstances

test if a strictly mathematical formula were to be applied”). What matters here is

that the Bacardis can easily rearrange their affairs to free up more than $1,400 in

monthly disposable income, allowing them to repay unsecured creditors more than

$85,000.

The Bacardis also contend that the amount they can repay their unsecured

creditors is too small to permit confirmation of a chapter 11 plan, presumably

because creditors will not vote for the plan. Perhaps not. But not every chapter 11

debtor manages to confirm a plan, and a chapter 7 debtor’s anticipated inability to

confirm a chapter 11 plan does not prevent the dismissal of his case for “abuse.”

The Sixth Circuit rejected this same contention in Krohn, where the debtor

opposed dismissal on the ground that he did not qualify for chapter 13 and “is not

likely to benefit from Chapter 11 relief because he has only minimal assets with

which to propose a plan.” Krohn, 886 F.2d at 127. The court accepted that premise

but nonetheless was unpersuaded that the debtor was “entitled to relief under some

provision of the Bankruptcy Code.” Id. (emphasis in original). Noting that

bankruptcy law is “a creature of congressional policy” and there is no constitutional

right to a discharge, the court concluded that the absence of a linkage between

chapters 7 and 13 showed “there are some circumstances where it would not be

equitable to grant a particular debtor a fresh start.” Id. The Code does not

guarantee a discharge to everyone.

In sum, it is an abuse of chapter 7 for the Bacardis – high income debtors

making over $200,000 a year – to keep an $800,000 house when they have a

reasonable housing alternative readily available that will permit a substantial

repayment to their unsecured creditors.

3. Conclusion

Debtors Brian and Jean Bacardi will be given 14 days to file a motion to

convert this case to a case under chapter 11. If no motion is filed in that time, the

motion of the U.S. Trustee to dismiss this case under section 707(b)(3) for abuse will

be granted. A separate order will be entered consist with this opinion.

Can a Wholly Unsecured Mortgage be “Stripped” in a Chapter 7 Bankruptcy

admin — Sat, 16 Jan 2010 03:57:22 +0000

The real estate crash created a huge problem for second mortgage holders. If the value of a home falls so low that the house is worth less than the balance of the first mortgage, the second mortgage can be “stripped off” in a chapter 13 bankruptcy. In a chapter 13, a mortgage that is stripped off is no longer secured by the real estate. As good as this sounds for consumers, there are several pitfalls. First, the debtor must complete the chapter 13 plan. This means that the consumer must make payments to the chapter 13 trustee for at least 3 years (more often 5 years). If for some unforseen reason, the consumer is unable to complete the plan, then the lien strip fails and it regains its secured status. Second, a stripped lien losses its secured interest, but it the second mortgage lender must still be paid as an unsecured creditor. This means that the second mortgage will be paid a percentage of its balance over the life of the chapter 13 plan.

Stripping a second mortgage in a chapter 7 is a much more powerful remedy in a chapter 7. In a chapter 7 bankruptcy, all unsecured liabilities are discharged upon completion of the case. The second mortgage would get nothing. If the consumer decided to sell the property down the road, they would not have to payoff the second mortgage to complete the closing.

It is well settled that the bankruptcy code allows for a lien strip of a second mortgage in a chapter 13. It is unclear whether a lien strip in a chapter 7 would be successful in the Northern District of Illinois. No judge in the Eastern Division has written an opinion on this subject. Judge Barbosa who hears the cases in the Western Devision and Kane County recently wrote an opinion denying a debtor’s ability to strip a wholly unsecured second mortgage in a chapter 7 case. See In re Arrieta. (unpublished opinion)

Recently Judge Eisenberg in the Eastern District of New York decided in the Lavelle case that a lien strip was permissible in chapter 7. This holding has huge positive implications consumers if it followed by a significant number of bankruptcy courts.

Below is the opinion:

MEMORANDUM DECISION AND ORDER

IN RE LAVELLE

Honorable Dorothy T. Eisenberg, United States Bankruptcy Judge

At issue is whether a second mortgage that is wholly unsecured by virtue of the first mortgage exceeding the value of the property may be “stripped off” pursuant to 11 U.S.C. 506(d). The Court has jurisdiction pursuant to 28 U.S.C. § 1334(a) and (b). This contested matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (K), and (O) and 11 U.S.C. §§ 105(a) and 506. The following constitutes the Court’s finding of fact and conclusions of law.

FACTS The Debtors filed for bankruptcy relief under chapter 7 of the Bankruptcy Code on April 9, 2009. The Debtors obtained their discharge on July 8, 2009.

The Debtors reside at a home in Levittown, New York (the “Property”). The Property is owned by the debtor husband. The Debtors listed the Property in their Schedules A and D to the bankruptcy petition as having a value of $400,000. The Debtors listed a first mortgage against the Property held by Bank of America, N.A. (“BOA”) in the amount of $411,183 on the petition date and a second mortgage also held by Bank of America in the amount of $9,904. As of May 2009, the outstanding balance on the second mortgage has grown to $10,127.99.

On May 12, 2009, BOA filed a motion seeking relief from stay, based on their second mortgage lien, in order to commence foreclosure proceedings on the basis that, inter alia, the Debtors have no equity in the Property. On June 1, 2009, the Debtors filed opposition to the motion for relief from stay and a cross motion seeking to avoid Bank of America’s second lien on the basis that under 11 U.S.C. § 506(a), a creditor has a secured claim only to the extent of the value of its collateral and an unsecured claim for the balance. Because the second mortgage is fully unsecured, no one challenges the fact that there is no value in the property beyond the first allowed secured claim and thus, under § 506(d), such an unsecured claim is not a lien against the property and, therefore, such lien is void. Although this is a chapter 7 case, the Debtors argue that the ability of the Court to modify wholly unsecured liens against a debtor’s residence in a chapter 13 case under 11 U.S.C. § 1322(b)(2) should be extended to chapter 7 cases because (1) there is no reason why unsecured liens can only be “stripped off” in a chapter 13 case and not in a chapter 7 and (2) the Debtors could obtain such relief by putting the Property into foreclosure and then immediately filing a chapter 13 case to achieve the same result.

Bank of America filed opposition to the Debtors’ cross-motion on July 30, 2009. A hearing was held on September 22, 2009. At the hearing, the Debtors concede that notwithstanding their cross-motion, the automatic stay did not apply to Bank of America’s attempts to proceed with a foreclosure sale because the automatic stay terminated upon the Debtors obtaining their discharge of debt on July 8, 2009. Bank of America is awaiting this Court’s decision as to whether this wholly unsecured lien can be “stripped off”.

DISCUSSION

The Court notes that the Debtors’ application should have been brought as an adversary proceeding rather than by motion, as Rule 7001(2) of the Federal Rules of Bankruptcy Procedures provides that an adversary proceeding includes “a proceeding to determine the validity, priority, or extent of a lien or other interest in property, other than a proceeding under Rule 4003(f).”

Notwithstanding the inappropriate form of the application for the relief sought, the Debtors seek to avoid BOA’s wholly unsecured second mortgage lien on the Property based upon 11 U.S.C. §§ 506 (a) and (d). In effect, the Debtors are objecting to the claim filed and allowed only as an unsecured claim.

Section 506 provides in relevant part:

(a)(1) An allowed claim of a creditor secured by a lien on property in which the estate has an interest is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property and is an unsecured claim to the extent that the value of such creditor’s interest is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.” . . .

(d) To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless – (1) such claim was disallowed only under section 502(b)(5) or 502(e) of this title; or (2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under section 501 of this title.

11 U.S.C. §§ 506 (a)(1), (d)(1-2). None of the exceptions to § 506(d) are applicable in this case.

The issues before the Court are: (1) whether BOA’s mortgage lien is an allowable

secured claim; and (2) if it is not an allowed secured claim, can the lien be stripped off as a

secured claim pursuant to sections 506(a) and 506(b).

Section 502 provides in relevant part:

(a): A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest, including a creditor of a general partner in a partnership that is a debtor in a case under chapter 7 of this title, objects.
(b): Except as provided in subsections (e)(2), (f), (g), (h) and (i) of this section, if such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that–(b)(1) [S]uch claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.

11 U.S.C. §§502 (a)-(b)(1). The Debtors argue that because a creditor’s lien on property is secured only to the extent of the value of such creditor’s interest where the creditor is wholly unsecured under § 506(a), then such lien is void under § 506(d), because it is not an “allowed secured claim.” BOA’s response relies on the U.S. Supreme Court’s decision in Dewsnup v. Timm, 502 U.S. 410 (1992).

After § 506 was enacted into the Bankruptcy Code in 1984, courts generally held that “the plain language of § 506(a) meant that a creditor held a secured claim for the amount of the lien up to the value of the collateral and an unsecured claim for any amount of the lien over the amount of the value of the collateral.” In re Smith, 247 B.R. 191, 195 (W.D. Va. 2000) (quoting Crossroads of Hillsville v. Payne, 179 B.R. 486, 490 (W.D. Va. 1995)). These courts further held that according to the plain language of § 506(d), the unsecured portion of a creditor’s lien is to be voided. See In re Folendore, 862 F.2d 1537 (11th Cir. 1989); In re Mays, 85 B.R. 955 (Bankr.

E.D.: Pa. 1988); In re Lindsey, 823 F.2d 189 (7th Cir. 1987); In re O’Leary, 75 B.R. 881 (Bankr.
D.: Or. 1987). When a lien is voided, any post-petition property appreciation inures to the benefit of the debtor under bankruptcy fresh start principles. See In re Crouch, 76 B.R. 91 (Bankr. W.D. Va. 1987).

Analysis of Dewsnup

In Dewsnup, the only mortgage on debtor’s property was partially secured. The issue in that case was whether it was proper to strip off the unsecured portion of the claim held by the mortgagee. The Court held that there is ambiguity in the text, and it is uncertain whether the words “allowed secured claim” in § 506(d) has the same meaning as in § 506(a). Id. at 417. Given such ambiguity, the Court was not convinced that Congress intended to depart from the opinion, the Supreme Court held that § 506(d) did not apply to a first lien securing a claim that

was fully allowed under 11 U.S.C. § 502, but rather only voids claims that have not been allowed

as secured.

Justice Scalia, joined by Justice Souter, strongly dissented, arguing that:

Read naturally and in accordance with other provisions of the statute, [506(d)] automatically voids a lien to the extent the claim it secures is not both an “allowed claim” and a “secured claim” under the Code. In holding otherwise, the Court replaces what Congress said with what it thinks Congress ought to have said — and in the process disregards, and hence impairs for future use, well established principles of statutory construction.

Id. at 420 (Scalia, J., dissenting). Section 506(a) says that an “allowed claim” is also a “secured claim” ‘to the extent of the value of [the] creditor’s interest in the estate’s interest in [the securing] property.’ Id. at 420-21 (quoting United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 239, 109 S. Ct. 1026, 103 L. Ed. 2d 290 (1989)).

Justice Scalia further points out that the phrase “allowed secured claim[s]” used in other subsections of § 506 and in other Bankruptcy Code sections invariably means what § 506(a) describes: “the portion of a creditors allowed claim that is secured after the calculation required by that provision have been performed.” Id. at 421. See 11 U.S.C. § 506(b); 11 U.S.C. § 722; 11

U.S.C. § 1225(a)(5); 11 U.S.C. § 1325(a)(5).

Justice Scalia further asserts that the Supreme Court holds that plain meaning of the Bankruptcy Code is dispositive to the exclusion of legislative history and judicial policy considerations. See Ron Pair Enterprises, Inc., 489 U.S. at 241. When the words of a statute are unambiguous, then, this first canon is also the last: ‘judicial inquiry is complete.’ Rubin v. United

While Dewsnup is subject to substantial judicial and scholarly criticism, “it remains the law of the land”. In re Cunningham, 246 B.R. 241, 246 (Bankr. D. Md. 2000) (citing Lawrence Ponoroff & F. Stephen Knippenberg, The Immovable Object Versus the Irresistible Force: Rethinking the Relationship Between Secured Credit and Bankruptcy Policy, 95 MICH. L. REV. 2234 (1997); Margaret Howard, Secured Claims in Bankruptcy: An Essay on Missing the Point, 23 CAP. U. L. REV. 313 (1994); Barry E. Adler, Creditors Rights After Johnson and Dewsnup, 10 BANKR. DEV. J. 1 (1993); Margaret Howard, Dewsnupping the Bankruptcy Code, 1 J. BANKR. L. & PRAC. 513 (1992)).

Distinguishing Dewsnup

However, Dewsnup is not applicable to every permutation of § 506(d) cases, as Dewsnup itself stated, “we therefore focus upon the case before us and allow other facts to await their legal resolution on another day.” Dewsnup, 502 U.S. at 416-17 (majority opinion).

The Debtor distinguishes Dewsnup from the present case advancing two arguments. First, Dewsnup holds that a Chapter 7 debtor may not “strip down” a first mortgage to the fair market value of the property. Second, Dewsnup disallowed a “strip down”; it did not address a “strip off”, which would remove a wholly unsecured junior lien, as opposed to a “strip down”, which reduces an under-secured lien to the fair market value of the collateral. In re Arrieta, No. 09 B 12052, 2009 Bankr. LEXIS 1683, at *2 – 3 (Bankr. N.D. Ill. June 22, 2009). Here, the Bank of America second mortgage is wholly unsecured, because the value of the collateral does not even secure the entire first mortgage lien. Debtor therefore argues that the wholly unsecured second lien is voidable under § 506(d), and should be “stripped off”.

While the Debtor’s first argument, that Dewsnup dealt with first mortgage liens is mortgage is different than a first mortgage under Dewsnup. If any part of the second mortgage lien is secured by some property, there is no authority that supports holding second mortgages to be outside of Dewsnup. There is no distinction based on Dewsnupthat stripping down a second mortgage is different than stripping down a first mortgage. In re Poirier, 214 B.R. 528, 529 (Bankr. D. Conn. 1997) (citing In re Willis, 157 B.R. 617, 621 (Bankr. N.D. Ohio 1993) (holding that under Dewsnup, the debtor could not avoid an allowed second mortgage under § 506(d), even though little or no equity remained in the property for the second mortgagee)). As long as the second mortgage had any value, Dewsnup would apply. Debtor’s second argument, distinguishing the instant case from Dewsnup because the second mortgage is wholly unsecured, is the issue before this Court.

Treatment of wholly unsecured consensual liens by other courts

Since Dewsnup, the issue of whether wholly unsecured liens with respect to consensual loans may be “stripped off”, as opposed to “stripped down” as addressed byDewsnup, has been a contentious issue between various bankruptcy and district courts and their respective Courts of Appeals.

The Fourth, Sixth and Ninth Circuits apply Dewsnup equally to both stripping down and stripping off of consensual liens. See Ryan v. Homecomings Fin. Network, 253 F.3d 778 (4th Cir. 2001); Talbert v. City Mortgage Servs., 344 F.3d 555 (6th Cir. 2003); In re Laskin, 222 B.R. 872

(B.A.P. 9th Cir. 1998).

In Dewsnup, where a portion of the value of the claim at issue exceeded the value of the property, the claim was both 1) allowed and 2) secured, albeit undersecured, for purposes of § 506(d). Because part of the claim was secured, it was considered a “secured claim” under § 506(d). However, where the claims are totally unsecured, there is no equity whatsoever for the junior lien to attach for purposes of § 506(a) because a creditor’s claim is secured only “to the extent of the value of such creditor’s interest in such property”. With respect to a wholly unsecured lien, the creditor de facto only has an unsecured claim under § 506(a). Accordingly, the wholly unsecured claims cannot qualify as “allowed secured claims” under § 506(d), and must be voided. In re Zempel, 244 B.R. 625, 629-30 (Bankr. W.D. Ky. 1999).

In regard to Chapter 13, the Supreme Court in Nobelman, Nobelman v. American Savings Bank, 508 U.S. 324 (1993), held that § 1322(b)(2) barred a Chapter 13 debtor from relying on § 506(a) to bifurcate an undersecured homestead mortgage to secured and unsecured components. In reaching this conclusion, the Supreme Court held it appropriate to look to § 506(a) as a preliminary matter to determine whether the claim in question was secured. See id. at 328-32. Because the mortgage in Nobleman was partially secured, under § 1322(b)(2) the claim is considered secured and may not be modified. This is consistent with Dewsnup. However, Nobelman is only applicable where the collateral retains some value. If the creditors are wholly unsecured under § 506(a), than § 1322(b)(2) will allow a debtor to reduce the claim to a general unsecured claim. In re Yi, 219 B.R. 394, 399 (E.D. Va. 1998)(citing Wright v. Commercial Credit Corp., 178 B.R. 703, 706-07 (E.D. Va 2005)); See In re Geyer, 203 B.R. 726, 729 (holding that “unless there is some equity to which a creditor’s lien attaches, there is no allowed secured claim” under § 506(a)). The majority of circuits and bankruptcy courts limit Nobelman to a partially secured lien. Where the creditors are wholly unsecured, looking first to § 506(a), the lien that is wholly without equity is an unsecured claim, and thus open to being void under § 506(d), and § 1322(b)(2) does not bar modification of a wholly unsecured lien. See In re Zimmer, McDonald, 205 F.3d 606, 615 (3d Cir. 2000); In re Tanner, 217 F.3d 1357 (11th Cir. 2000); In re Mann, 249 B.R. 831, 840 (B.A.P. 1st Cir. 2000); First Mariner Bank v. Johnson, 411 B.R. 221, 224-225 (D. Md. 2009); In re Sette, 164 B.R. 453, 456 (Bankr. E.D.N.Y. 1994); In re Hornes, 160 B.R. 709 (Bankr. D. Conn. 1993). These holdings in a Chapter 13 context clearly demonstrate that under the Code it is appropriate under § 506(a) and § 506(d) to distinguish partially secured liens from wholly unsecured liens. Once it is established that Dewsnup is distinguished, there is no reason why in a Chapter 7 context the same language in §§ 506(a) and

(d) should not void the lien of a wholly unsecured claim.

The present case is easily distinguished from Dewsnup, therefore the wholly unsecured lien cannot qualify as an “allowed secured claim” under § 506(a), and is void under § 506(d). First, the Bank of America second mortgage cannot be considered a secured claim under § 506(a), because the junior claim is wholly unsecured. Accordingly, the plain meaning of § 506(d) requires the lien to be voided. Second, the Supreme Court itself limited Dewsnup to its specific facts, and in light of the persuasive argument of Justice Scalia in the dissent regarding the requirement to interpret a seemingly unambiguous statute according to its plain textual meaning, Dewsnup should be narrowly interpreted. Because this case is substantially distinguished from Dewsnup, there is no reason for this Court to read § 506(a) and § 506(d) in any way other than their plain textual meaning. The plain meaning is applied to Chapter 13 section 1322(b)(2) analysis where the lien is wholly unsecured, and there is no logical reason to read the text differently when applied to Chapter 7 wholly unsecured liens.

Arguments that debtors will benefit from possible windfalls, are not persuasive. Markets are uncertain, and it is not certain such a scenario will ever occur. Secondly, the creditors’ right

the property for them. Bankruptcy is not intended to benefit either the creditor in securing a

potential increase in property value, or the debtor. However, where the future is unknown,

bankruptcy principles of giving the debtor a fresh start should apply. While these issues of

debtors’ and creditors’ rights are the subject of long standing philosophical debate, in light of the

unambiguous, clear language of §§ 506(a) and (d), § 506(d) requires this Court to void the lien as

a matter of law regardless of any possible further potential debtor benefits.

CONCLUSION

BOA’s second mortgage claim is not an allowed secured claim pursuant to section 502 of

the Bankruptcy Code, since it has no collateral to support its claim. It is an allowed unsecured

claim.

Based upon the foregoing, the Debtors’ cross-motion to void Bank of America’s second mortgage lien pursuant to 11 U.S.C. §§ 506(a) and 506(d) against the Property is granted. So ordered.

Dated: Central Islip, New York November 25, 2009 s/Dorothy Eisenberg ___________ Dorothy Eisenberg United States Bankruptcy Judge

Are Student Loans Discharged in Bankruptcy?

admin — Fri, 15 Jan 2010 03:56:37 +0000

The default position is that student loans are not discharged in either chapter 7 or chapter 13 bankruptcy. The only exception to this rule is if the consumer suffers from an “undue hardship” due to the student loan liability. Unfortunately, bankruptcy courts take a very narrow view the “undue hardship” standard. Most courts follow the standard announced in a New York called In re Brunner. According to Brunner, a student-loan borrower most prove the following to get a discharge:

If forced to repay the loans, the debtor could not maintain a minimal standard of living
Circumstances show that this status is likely to continue for the forseeable future, and
The borrower made a good faith effort to repay the loans.

Obviously, this is a tough standard to meet. Most people who have been successful in meeting the undue hardship standard were permanently disabled and still made efforts to pay the student loan.

Borrowers who think they might meet this standard are required to file a lawsuit within the bankruptcy to determine whether the student loan debt is indeed discharged.

I have attached Brunner the opinion below.

United States Court of Appeals, Second Circuit.

Argued September 22, 1987.Decided October 14, 1987.

Marie Brunner, pro se.

Frederick J. Schreyer, Albany, N.Y., for appellee.

Before LUMBARD, OAKES and KEARSE, Circuit Judges.

PER CURIAM:

Marie Brunner, pro se, appeals from a decision of the United States District Court for the Southern District of New York, Charles S. Haight, Judge, which held that it was error for the bankruptcy court to discharge her student loans based on “undue hardship,” 46 B.R. 752 (Bankr.D.C.N.Y.1985). We affirm.

While this court is obliged to accept the bankruptcy court’s undisturbed findings of fact unless they are clearly erroneous, it is not required to accept its conclusions as to the legal effect of those findings. Montco, Inc. v. Glatzer (In re Emergency Beacon Corp.), 665 F.2d 36, 40 (2d Cir.1981) (citing Queens Blvd. Wine & Liquor Corp. v. Blum, 503 F.2d 202 (2d Cir.1974); R.Bankr.P. 810 (current version, see R.Bankr.P. 8013); Bank of Pa. v. Adlman, 541 F.2d 999, 1005 (2d Cir.1976)). Whether not discharging Brunner’s student loans would impose on her “undue hardship” under 11 U.S.C. § 523(a)(8)(B) requires a conclusion regarding the legal effect of the bankruptcy court’s findings as to her circumstances. Therefore, the bankruptcy court’s conclusion of “undue hardship” properly was reviewed by the district court.

As noted by the district court, there is very little appellate authority on the definition of “undue hardship” in the context of 11 U.S.C. § 523(a)(8)(B). Based on legislative history and the decisions of other district and bankruptcy courts, the district court adopted a standard for “undue hardship” requiring a three-part showing: (1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans. For the reasons set forth in the district court’s order, we adopt this analysis. The first part of this test has been applied frequently as the minimum necessary to establish “undue hardship.” See, e.g., Bryant v. Pennsylvania Higher Educ. Assistance Agency (In re Bryant), 72 B.R. 913, 915 (Bankr.E.D.Pa.1987); North Dakota State Bd. of Higher Educ. v. Frech (In re Frech), 62 B.R. 235 (Bankr.D.Minn.1986); Marion v. Pennsylvania Higher Educ. Assistance Agency (In re Marion), 61 B.R. 815 (Bankr.W.D.Pa.1986). Requiring such a showing comports with common sense as well.

The further showing required by part two of the test is also reasonable in light of the clear congressional intent exhibited in section 523(a)(8) to make the discharge of student loans more difficult than that of other nonexcepted debt. Predicting future income is, as the district court noted, problematic. Requiring evidence not only of current inability to pay but also of additional, exceptional circumstances, strongly suggestive of continuing inability to repay over an extended period of time, more reliably guarantees that the hardship presented is “undue.”

Under the test proposed by the district court, Brunner has not established her eligibility for a discharge of her student loans based on “undue hardship.” The record demonstrates no “additional circumstances” indicating a likelihood that her current inability to find any work will extend for a significant portion of the loan repayment period. She is not disabled, nor elderly, and she has — so far as the record discloses — no dependents. No evidence 397was presented indicating a total foreclosure of job prospects in her area of training. In fact, at the time of the hearing, only ten months had elapsed since Brunner’s graduation from her Master’s program. Finally, as noted by the district court, Brunner filed for the discharge within a month of the date the first payment of her loans came due. Moreover, she did so without first requesting a deferment of payment, a less drastic remedy available to those unable to pay because of prolonged unemployment. Such conduct does not evidence a good faith attempt to repay her student loans.

It is true, however, that considerable time has elapsed since the original filing of Chapter 7 proceedings, and even since the hearing before the bankruptcy judge. We note that Judge Haight’s order was without prejudice to Brunner’s seeking relief pursuant to R.Bankr.P. 4007(a), (b).

Judgment affirmed.

Chapter 7 Debtors Case Dismissed for Failing “totality of circumstances” Test

admin — Thu, 14 Jan 2010 03:51:11 +0000

In re Bacardi:

In this case, Judge Goldgar ruled that these debtors could not get a Chapter 7 discharge because they failed the totality of the circumstances test contained in 707(b)(3). The Bacardi family earned a high income above $200,000 per year. They had three homes. Some of their expenses were too high in the opinion of the court. After weighing these facts, Judge Goldgar determined that the Bacardis were not eligible for chapter 7 relief. The full opinion is below.

Caption: In re Brian E. Bacardi and Jean M. Bacardi Bankruptcy No. 09 B 25757

Date of Issuance: January 6, 2010

Judge: A. Benjamin Goldgar

Appearance of Counsel:

Attorneys for debtors Brian E. Bacardi and Jean M. Bacardi: Donna B. Wallace, Joseph A. Baldi & Associates, P.C., Chicago, IL

Attorney for William T. Neary, United States Trustee: Roman L. Sukley, Office ofthe U.S. Trustee, Chicago, IL

1. Facts

The facts are taken from the Bacardis’ petition, schedules, and other filings with the court, as well as from the parties’ memoranda. No facts are in dispute.

Brian Bacardi is a podiatrist with his own practice. The practice is a mobile one: Dr. Bacardi sees patients in their homes. Jean Bacardi is a chemical engineer. The Bacardis have three sons, ages 13, 12, and 8, and live in Hawthorn Woods, Illinois.

The Bacardis together earn $18,000 per month, some $216,000 annually before taxes. They own three properties: their current residence, a house on Deer Point Drive in Hawthorn Woods, valued on the Bacardis’ amended Schedule A at $790,000; a house on Squire Road in Hawthorn Woods valued at $500,000; and a condominium in Fort Walton Beach, Florida, valued at $400,000. The mortgage balances on each property currently exceed the property’s value – in the case of the Deer Point Drive property, by almost $200,000. The monthly mortgage payment and real estate taxes on the Squire Road property total $4,419. The monthly mortgage payments and real estate taxes on the Deer Point Drive property where the Bacardis now reside total $6,234. The monthly mortgage payments and assessment on the Florida condo total $3,455, until August 2009 partially offset by $1904 in monthly rental income.¹^/

The Bacardis lived in the Squire Road property from 1994 until 2006, when they moved to the Deer Point Drive property. The Bacardis meant to sell the Squire Road property in connection with the move but were unable to do so. For a time they rented the property. Then, they used more than $250,000 in retirement funds to pay the mortgages and other expenses not only on the Squire Road property but on the Deer Point Drive property and the Florida condo. Once the Bacardis exhausted their retirement funds, they used their credit cards to pay the mortgages and expenses. Meanwhile, the collapse of the real estate market not only impaired their ability to sell the Squire Road property but reduced the market values of all the properties below the amounts the Bacardis owed on the mortgages.

¹^/The $3,455 figure represents the total expenses shown on the Bacardis’amended Schedule J, and the $1,904 rent figure is from their amended Schedule I.In their response memorandum, the Bacardis give figures totaling $3,415 as theexpenses associated with the Florida condo and list $1905 as the rent. Since a debtor’s schedules are submitted under oath, the amended Schedules I and J are more reliable than the memorandum.

On July 16, 2009, the Bacardis filed a chapter 13 bankruptcy case. Two weeks later, the Bacardis converted the case to a case under chapter 7. (No reason for the conversion has been given, but it appears the Bacardis were well over the debt limit in section 109(e) for a chapter 13 case). The Bacardis’ amended schedules filed on July 29, 2009, disclose the three real properties and the associated mortgages as well as three vehicles (a 2002 Ford Explorer, a 2004 Ford Taurus, and a 2006 Dodge Caravan.) According to amended Schedule D, the Bacardis have about $2.1 million in secured debt, of which $436,000 exceeds the value of the collateral. Amended Schedule E discloses $52,500 in priority unsecured debt consisting of taxes owed to the IRS and the Lake County Treasurer. On amended Schedule F, the Bacardis report $106,000 in nonpriority unsecured debt, most of it credit card debt.

An amended Schedule J filed July 30, 2009, reflects, among others, the following monthly expenses: $720 for heating, electricity, and home maintenance on the Deer Point Drive property, $3,455 for mortgage payments and assessments on the condominium, $115 for cable television, $130 for cell phone use, $500 for “children’s sports activities,” and $75 for recreation. Schedule J also disclosed $3,261 in monthly business expenses for Brian Bacardi’s practice. A separate amended business income and expense statement broke those expenses down. They included $718 for seminars and continuing education, $717 for billing, and $100 a month for internet service.

The amended Form B22A filed on July 29, 2009, the means test form, showed that the Bacardis passed the means test in section 707(b)(2), and their case did not give rise to a presumption of abuse. The U.S. Trustee has not contested the Bacardi’s calculations on the form and has not disputed that there is no presumption of abuse.

On October 22, 2009, however, the U.S. Trustee filed a motion to dismiss the Bacardis’ case under section 707(b)(3) of the Code. The U.S. Trustee argued that given the Bacardis’ high income, a home the Trustee describes as a “luxury home on a lake,” and many unreasonably high expenses (including expenses for a Florida condo and certain of Brian Bacardi’s business expenses) made the case an abuse of the provisions of chapter 7 under the “totality of the circumstances” in section 707(b)(3)(B), notwithstanding the results of the means test.

In response, the Bacardis explain how they inadvertently ended up with three real properties on their hands. They note that they intend to surrender the Squire Road property to foreclosure. And although they originally intended to retain the Florida condo, they are now willing to surrender that property to foreclosure as well.

In their response, the Bacardis concede that certain expenses (such as the $500 for children’s sports activities and the cable television bill) are excessive. Nevertheless, the Bacardis insist that with the surrender of the two properties and the reduction of certain expenses, their case is not an abuse. In particular, they argue, a revised Schedule J with hypothetical reductions in expenses would produce only $129 in disposable income, making it impossible for them to pay any meaningful amount to unsecured creditors or confirm a chapter 11 plan.

2. Discussion

This U.S. Trustee is correct that this case is an abuse of chapter 7. The expenses that the U.S. Trustee identifies aside, the Bacardis are high income debtors living in an expensive house although they have a considerably less expensive house available to them. Surrendering the expensive house and retaining the less expensive one would permit the Bacardis to make a substantial payment to their unsecured creditors. Reducing some of the Bacardis’ other expenses would permit an even more substantial payment.

Section 707(b)(1) of the Bankruptcy Code permits the dismissal of a chapter 7 debtor’s case if granting that debtor relief “would be an abuse of the provisions of this chapter.” 11 U.S.C. § 707(b)(1). Under section 707(b)(2), the court must “presume abuse” if a debtor fails the means test. Under section 707(b)(3), a court may dismiss the case of a debtor who passes the means test, or who manages to rebut the presumption of abuse under section 707(b)(2), if the debtor filed the petition in bad faith or if “the totality of the circumstances . . . of the debtor’s financial situation demonstrates abuse.” 11 U.S.C. § 707(b)(3)((A), (B); In re Ross-Tousey, 549 F.3d 1148, 1161-62 (7th Cir. 2008).

“Totality of the circumstances,” a phrase that appeared in section 707(b) even before BAPCPA’s 2005 revision of the Bankruptcy Code, is not defined, and the Seventh Circuit has never addressed it. The post-BAPCPA structure of the statute, however, gives some guidance to its meaning. Section 707(b)(2) creates an objective test under which some cases are presumed abusive. Section 707(b)(3) then permits dismissal even if a debtor passes the objective test, setting up a contrasting “totality of the circumstances” test that requires a more subjective, holistic assessment of the debtor and his circumstances.See In re Sullivan, 370 B.R. 314, 319 (Bankr. D. Mont. 2007) (describing section 707(b)(3) as “subjective”); see also In re Haar, 373

B.R. 493, 499 (Bankr. N.D. Ohio 2007) (calling section 707(b)(3) an “equitable test” as opposed to the “rigid, mechanical formula” in section 707(b)(2)).

In addition, the separate requirement in section 707(b)(3)(A) that the court dismiss a case when the petition was filed in “bad faith” indicates that a case can be dismissed for abuse under the “totality of the circumstances” test in (B) based solely on ability to pay and without, for example, proof of misconduct on the debtor’s part. In re Perelman, ___ B.R. ___, ___, 2009 WL 3490758, at *8 (Bankr. E.D.N.Y. Oct. 30, 2009). Some courts have held otherwise, see, e.g., In re Nockerts, 357 B.R. 497, 5068 (Bankr. E.D. Wis. 2006) (holding that “more than the ability to fund a chapter 13 plan” must be shown to dismiss a case under section 707(b)(3)(B)), but these courts are a minority, see, e.g. In re Boule, 415 B.R. 1, 5 (Bankr. D. Mass. 2009) (declining to follow Nockerts); see also In re Jensen, 407 B.R. 378, 383 (Bankr. C.D. Cal. 2009) (same, and noting that “the majority of courts and commentators” disagree with Nockerts); In re Parada, 391 B.R. 492, 498 (Bankr. S.D. Fla. 2008) (same).

Before BAPCPA, the courts of appeals in six circuits had interpreted “totality of circumstances” by adopting open-ended, multi-factor tests. See Costello v.

Bodenstein, No. 01 C 9696, 2002 WL 1821663, at *3 (N.D. Ill. Aug. 7, 2002) (citing cases). Except for the Fourth Circuit in In re Green, 934 F.2d 568 (4th Cir. 1991), these courts agreed that the primary factor in determining what the pre-BAPCPA version of the statute called “substantial abuse” (rather than merely “abuse”) was the debtor’s ability to repay his debts. See Costello, 2002 WL 1821663, at *4. These courts of appeals also concluded that an ability to repay debts standing alone could be sufficient to warrant dismissal, although other factors might be relevant. Id.

Other relevant factors could include whether the debtor has a stable source of future income, whether his expenses can be reduced significantly without depriving him of adequate food, clothing, shelter and other necessities, whether the petition was filed because of sudden illness calamity, disability or unemployment, whether the debtor incurred cash advances and made consumer purchases far in excess of his ability to pay, and whether the debtor’s schedules reasonably and accurately reflect his true financial condition. See Green, 934 F.2d at 572; In re Krohn, 886 F.2d 123, 127 (6th Cir. 1989). The “totality of the circumstances” analysis is fact-intensive and performed on a case-by-case basis. In re Stewart, 175 F.3d 796, 809 (10th Cir. 1999).

In this case, the Bacardis have the ability to pay creditors even with no reduction in the expenses the U.S. Trustee deems excessive. The amended Schedule J shows average monthly income of $16,273 and average monthly expenses of $18,755, resulting in negative net monthly income of $2,482.57. But these figures assume that the Bacardis will have the expenses (and the income) associated with the Florida condo when in fact they have decided not to keep the condo. More important, they assume the Bacardis will continue to live on their Deer Point Drive property with its attendant monthly expenses of $6,234 and surrender the Squire Road property.

If the Bacardis surrendered not only the condo but the Deer Point Drive property and instead retained the Squire Road property, they could make a significant payment to their unsecured creditors. Surrendering the condo would reduce the Bacardis’ income to $14,368 and expenses to $15,300. Surrendering the Deer Point Drive property rather than the Squire Road property would replace $6,234 in monthly mortgage and tax payments with monthly mortgage and tax payments of $4,419, reducing the Bacardis’ expenses another $1,815 to $13,485 and giving the Bacardis positive monthly net income of $883 ($14,368 minus $13,485). Sixty monthly payments of $883 would total $52,980. Taking just the additional $550 reduction the Bacardis themselves propose in expenses for cable television and sports activities would produce monthly net income of $1,433 which over sixty months would total $85,980. See Boule, 415 B.R. at 8 (noting that $1,000 in excess monthly income is a number “large enough to question” why a debtor “is not making an attempt to pay something to her creditors”).

A debtor’s budget may be excessive or unreasonable because of high housing expenses, including a high mortgage payment. See In re Crink, 402 B.R. 159, 171 (Bankr. M.D.N.C. 2009) (citing numerous cases for this proposition). In Crink, for example, the court found the debtors’ housing expenses unreasonable because they totaled 61% of the debtors’ budget and were devoted to a $478,000 house in which the debtors had no equity. Id. The court noted that in considering whether housing expenses are unreasonable, “due regard should be given to the size of the family, their reasonable needs, and the cost of alternative housing,” id., but nevertheless found the housing expenses showed abuse and justified dismissal, id. at 172.

In this case, the Bacardis’ housing expenses associated with the Deer Point Drive property are likewise unreasonably high. The mortgage payment and real estate taxes alone make up 40% of the Bacardis’ total expenses. If utilities and maintenance are included, the expenses grow to $6,954, and the percentage of the total increases to 45%. Not only are the Bacardis paying an excessive amount of their income to live on Deer Point Drive, but they propose to continue making these payments to retain an $800,000 property in which they do not remotely have any equity.

Fortunately, the Bacardis have an alternative: the Squire Road property. The Squire Road property is in the same municipality, Hawthorn Woods, and the Bacardi family is no larger than it was in 2006, only three years ago, when the Bacardis moved out. The Bacardis thus have no “longstanding, traditional ties to a homestead” that might weigh in favor Deer Point Drive. Crink, 402 B.R. at 171. Nor do the Bacardis offer any reason to keep the Deer Point Drive property, a property that can fairly be termed a luxury item, In re Oot, 368 B.R. 662, 667 (Bankr. N.D. Ohio 2007) (finding that a $430,000 house with a $4,000 mortgage payment “can only be categorized as a luxury item”), when the Squire Road property is available. The cost of living at the Squire Road property is $1,815 less

per month than the cost of living at the Deer Point Drive property. Returning to

Squire Road, along with a little “good, old-fashioned belt-tightening,” Krohn, 886

F.2d at 128, would permit a substantial dividend to unsecured creditors. Fairness

to those creditors demands at least that much.²^/

In opposing the U.S. Trustee’s motion, the Bacardis insist they will be able to

repay only a small percentage of their unsecured debt in a chapter 11 case. Not so.

Even if probable deficiency claims of $388,000 from the Florida condo and Deer

Point Drive property are added to the $158,500 in priority and nonpriority

unsecured debt shown on the Bacardis’ schedules, plan payments totaling $52,980

(the Bacardis’ disposable income over five years if the Deer Point Drive property is

²^/Some courts hold that unreasonable housing costs alone, specificallyunreasonable mortgage payments, do not provide a basis for dismissal under section707(b)(3). See, e.g., In re Dumas, ___ B.R. ___, 2009 WL 3856664 (Bankr. E.D. Tex.Nov. 17, 2009); In re Johnson, 399 B.R. 72 (Bankr. S.D. Cal. 2008). These courts reason that in both chapter 13 and chapter 11 cases an above-median debtor’sdisposable income is calculated using the means test in section 707(b)(2), thatsection 707(b)(2)(A)(iii) permits an unlimited deduction for payments on secureddebt (including mortgage payments), that a debtor will therefore have no greaterability to repay creditors in a chapter 13 or chapter 11 case, and thus that a debtor’s“housing payment has been effectively immunized from scrutiny on the basis ofreasonableness.” Dumas, ___ B.R. at ___, 2009 WL 3856664 at *4. One problemwith this view is that the means test does not in fact apply in chapter 11. Section 1129(a)(15) mentions section 1325(b)(2) but not section 1325(b)(3). See 11 U.S.C. §1129(a)(15). Another problem is that this view makes the means test dispositiveunder section 707(b)(3) and limits what courts can consider under that section,although section 707(b)(3) applies even when a case passes the means test andexpressly requires courts to consider the “totality of the circumstances.” Courts adhering to the view in Dumas andJohnson would presumably find no abuse inletting a chapter 7 debtor continue making payments on the castle in Spain whilepaying nothing to his unsecured creditors.

surrendered and the Squire Road property retained) would repay 10% of the Bacardis’ unsecured debt. Plan payments totaling $85,980 (the Bacardis’ disposable income over five years if the Deer Point Drive property is surrendered and a few additional expenses are reduced) would repay 16% of the Bacardis’ unsecured debt.³^/

More important, the raw percentage of unsecured debt a debtor can conceivably repay in a chapter 13 or chapter 11 case is not dispositive of abuse under section 707(b)(3). If it were, a debtor could avoid dismissal for abuse simply by incurring massive amounts of debt and reducing the percentage of his repayment proportionally. See Boule, 415 B.R. at 7-8 (recognizing that the “amount of unsecured debt and a potential dividend are inversely proportional so that debtors with higher amounts of debt might skate around the totality of the circumstances test if a strictly mathematical formula were to be applied”). What matters here is that the Bacardis can easily rearrange their affairs to free up more than $1,400 in monthly disposable income, allowing them to repay unsecured creditors more than $85,000.

The Bacardis also contend that the amount they can repay their unsecured creditors is too small to permit confirmation of a chapter 11 plan, presumably because creditors will not vote for the plan. Perhaps not. But not every chapter 11 debtor manages to confirm a plan, and a chapter 7 debtor’s anticipated inability to confirm a chapter 11 plan does not prevent the dismissal of his case for “abuse.”

³^/In the absence of deficiency claims, of course, the potential dividend tounsecured creditors grows to 33% if $52,980 is repaid and 54% if $85,980 is repaid.

The Sixth Circuit rejected this same contention in Krohn, where the debtor opposed dismissal on the ground that he did not qualify for chapter 13 and “is not likely to benefit from Chapter 11 relief because he has only minimal assets with which to propose a plan.” Krohn, 886 F.2d at 127. The court accepted that premise but nonetheless was unpersuaded that the debtor was “entitled to relief undersome provision of the Bankruptcy Code.” Id. (emphasis in original). Noting that bankruptcy law is “a creature of congressional policy” and there is no constitutional right to a discharge, the court concluded that the absence of a linkage between chapters 7 and 13 showed “there are some circumstances where it would not be equitable to grant a particular debtor a fresh start.” Id. The Code does not guarantee a discharge to everyone.

In sum, it is an abuse of chapter 7 for the Bacardis – high income debtors making over $200,000 a year – to keep an $800,000 house when they have a reasonable housing alternative readily available that will permit a substantial repayment to their unsecured creditors.⁴^/

3. Conclusion

Debtors Brian and Jean Bacardi will be given 14 days to file a motion to convert this case to a case under chapter 11. If no motion is filed in that time, the

⁴^/This case would an abuse even if the Bacardis had no second, less expensive home available to them. The Bacardis are high income debtors withexcessive housing costs, costs they are effectively asking their unsecured creditorsto bear. They have the ability to repay those creditors, at least in part, and shoulddo so.

motion of the U.S. Trustee to dismiss this case under section 707(b)(3) for abuse will

be granted. A separate order will be entered consist with this opinion.

What is the Statute of Limitations for a Medical Bill in Illinois?

admin — Fri, 25 Dec 2009 21:09:05 +0000

A Statute of Limitations defense is always waaaay more complicated than it seems on its face. It is no different in the medical billing context.

Most medical bills are derived from unwritten, implied contracts. For example, if you get into a car accident and go to the emergency room, the hospital will provide service before you execute a written contract binding you agree to pay a set amount for the service. This is an example of an implied contract. In Illinois, the statute of limitation for implied contracts is 5 years. See 735 ILCS 5/13-205. But be careful. The 5 years starts to run from the date of the last payment to the hospital for the services provided. Not the date of service. Also, if you moved out of the state for a period of time, the hospital may be able to defeat a statute of limitation defense. A statute of limitation defense can be problematic if the insurance company made payments to the hospital on behalf of the consumer. This issue is explored in Sexton v. Brach, 124 Ill.App.3d 202, 464 N.E.2d 284 (3d Dist. 1984).

The news is worse if the consumer signed a written agreement to pay the hospital bill. In this situation, the statute of limitation is 10 years. See 735 ILCS 5/13-206. However, the written agreement must be complete. If it lacks essential terms such as price, then a court might construe the written contract as an implied contract and the the statute of limitations would be only 5 years. See Schmidt v. Niedert, 45 Ill.App3d 9, 358 N.E.2d. 1305 (1st Dist. 1976).

In summary, the statute of limitations can be a complete defense to a medical bill. However, be sure to examine your fact pattern for the pitfalls described above.

Do you have a right to receive your college transcript if tuition debts are discharged in bankruptcy?

admin — Sat, 25 Apr 2009 18:58:06 +0000

In the 7th Circuit, YES.

In the case below, the debtor, Stefanie Kuehn filed a chapter 7 bankruptcy after completing her studies at Cardinal Stritch University. Included in her bankruptcy were debts owed for tuition. After she received her discharge, Ms. Kuehn contacted the University for a copy of her transcript. The university refused to release them. Ms. Kuehn then reopened her bankruptcy case and filed a motion alleging that the university was violating the automatic stay and the discharge injunction.

United States Court of Appeals

For the Seventh Circuit

N THE MATTER OF STEFANIE KIM KUEHN,

Debtor-Appellee

Appeal from the United States District Court for the Western District of Wisconsin.

This case presents a single question: Does a university violate the Bankruptcy Code’s

automatic stay or discharge injunction by refusing to provide a transcript because pre-petition debt remains

unpaid?

Stefanie Kim Kuehn, an art teacher, enrolled in a two-year master’s degree program at Cardinal Stritch University. She took advantage of the University’s pay-asyou-go plan but stopped paying midway through the first year. The University nonetheless allowed her to take exams, receive grades, and sign up for new classes.

She completed all of the work required for a master’s

degree, which the University awarded. But when Kuehn

asked for a transcript

increase in salary from her school district

Unwilling to pay her debt to the University

though the increase in her salary would cover the whole

tuition in less than two years, and she could have borrowed

against that increase

transcript without payment, Kuehn filed a bankruptcy

petition listing the University as a creditor. (Kuehn’s

lawyer had advised her that the University would have

to provide her a transcript if she filed for bankruptcy.)

While the case was pending Kuehn again requested a

transcript, and the University again refused to provide

one. After the bankruptcy court issued an order discharging

her debt to the University, 11 U.S.C. §727, Kuehn yet

again asked for a transcript and as before agreed to pay

the transcript fee, but not the tuition. Again the University

refused. Kuehn contends that the pre-discharge refusal

violated the Bankruptcy Code’s automatic stay, 11 U.S.C.

§362(a), and the later one the discharge injunction,

11 U.S.C. §524(a), because the refusals were acts to

collect her unpaid debt. Bankruptcy Judge Martin

ordered the University to provide a transcript and pay

damages and attorneys’ fees. The district court affirmed.

2007 U.S. Dist. L

EXIS 88191 (W.D. Wis. Nov. 30, 2007). It

followed

In re Merchant , 958 F.2d 738, 741 (6th Cir. 1992),

the only appellate decision on the subject

taking “any act to collect, assess, or recover a claim against the debtor that arose before [the filing of a bankruptcy

petition]” until the bankruptcy proceeding is closed or dismissed. Section 524(a)(2) “operates as an

injunction against . . . an act, to collect . . . [discharged debt] as a personal liability of the debtor”. Other subsections

prohibit using legal process to collect, enforcing a prepetition judgment, or exercising control over the property

of the debtor. See §§ 362(a)(1)–(3), 524(a)(1)–(3). Kuehn argues that the University violated these sections when

it refused to produce her transcript. According to her, because a transcript has no intrinsic value to the

University, a refusal to provide one must be an act to collect. The University concedes that its policy is

designed to induce students to pay their tuition, but it maintains that an “act to collect” for the purpose of the

Bankruptcy Code is limited to a positive step, such as repossessing a car. A passive failure to do what the

debtor desires is not an “act,” the University submits. The University treats the transcript as a product that it is

not obliged to sell to someone with whom it no longer wants to do business.

If Kuehn had attempted to purchase a transcript on credit, and the University, having been burned once,

proved unwilling to make another loan, this would be an easy case. Sections 362(a) and 524(a)(2) apply only

when a creditor acts to

credit score, the use of a credit score is forward-looking.

Potential creditors consider creditworthiness to evaluate

the wisdom of future transactions, not to collect unpaid

debts. Any other entity deciding whether to extend

credit would consider Kuehn’s failure to pay, and the

University may do the same.

Other sections of the Bankruptcy Code set out some

circumstances in which creditors may not consider a

debtor’s prior bankruptcy filing. See 11 U.S.C. §366 (utilities

may not refuse services if the debtor provides

adequate assurance of payment within 20 days); 11 U.S.C.

§525 (anti-discrimination provision applicable to employers

and government entities). Otherwise, however,

yesterday’s failure to pay is a proper basis for tomorrow’s

refusal to extend credit. The Fair Credit Reporting Act

permits bankruptcy filings to appear on consumer

reports for 10 years from the date of discharge. See 15

U.S.C. §1681c. It follows that within 10 years from the

date of discharge a prospective creditor may consider

discharged debts in determining creditworthiness.

But Kuehn is willing to pay in advance for a transcript

of her grades, and the University’s only reason for

balking is to induce her to pay for the education

but, alas, an unreasoned one. Section 362(a)(6) prohibits pre-petition creditors fromcollect a pre-petition or discharged

debt. Although the failure to repay a debt factors into a

it does not have a contractual obligation to provide a

transcript and that, without an obligation, a passive

refusal to deal cannot be an act to collect. It relies on

which it says establishes that refusal to deal cannot be

an “act to collect”.

held that a bank did not

violate the automatic stay by placing a hold on a

checking account while asking the bankruptcy court to

lift the stay, so that the bank could set off the

account’s balance against an obligation the debtor owed

to the bank. The Court concluded that a hold designed

to maintain the status quo while the bankruptcy

court considers the request does not violate §362. See

516 U.S. at 21. This does not imply that the bank could

keep the account blocked no matter what happened in

the bankruptcy, or even after a discharge. The Court

concluded that the bank’s delay was not an act to collect

because it had a right under state law, a right preserved

by the Bankruptcy Code, to set off the checking-account

balance against the debt to the bank. That right would

be undercut if the automatic stay permitted the debtor to

drain the checking account while the bank’s hands were

tied. But money owed to a university cannot be set off

against a transcript of grades

Boston & Maine Corp. v. Chicago Pacific Corp

., 785 F.2d 562 (7th Cir. 1986)

and the University’s refusal is not designed to afford time

for judicial decision.

The district court applied what several courts have

dubbed a “coercive effects” test: a creditor acts to collect

a debt if it acts or fails to act, in a coercive manner, with

the sole purpose of collecting that debt. This “test” can’t

be found in the Code, and situations to which it

applies will be rare, because most acts or failures to act

have multiple purposes, such as minimizing risk based on

6 No. 07-3954 creditworthiness. A rational creditor does itself no

favors by refusing to engage in future transactions

when the debtor will pay cash. See

, 359 F.3d 866, 873 (7th Cir. 2004). If the creditor has competitors,

the debtor will deal with them and the creditor

loses profit. If the creditor has market power in the

goods or services being sold, it will maximize its profit

by setting a monopoly price for future transactions, not

by trying to collect a debt. Pursuing bygones is a sure

way to reduce future profits. If the University is not

obligated to provide Kuehn a transcript, its best course

of action is to sell the transcript for as much money as

possible. That amount is unrelated to Kuehn’s unpaid debt.

At oral argument we asked the University if it could

charge Kuehn a large sum (say, 25% of the salary

increase she stands to receive from her employer) for a

transcript. It replied that it could not. That answer undermines

its position that it has no obligation to provide a

transcript to Kuehn. A provider of goods and services

usually is free to charge whatever the market will bear.

We could not find any laws or regulations limiting the

price of college transcripts. So why does the University

think that the fee for a transcript must be nominal, limited

to the costs of printing and certifying the grades? Perhaps

the answer is that providing a transcript is an implicit

part of the educational contract, covered by the fee for

the course hours, and that Kuehn therefore has a contract

or property right for which she has already paid.

(Well, she hasn’t paid, but her obligation to do so has

been discharged, so it comes to the same thing.) The

University cannot charge Kuehn extra if the fee for instruction covers transcripts too. Then the University’s refusal

to certify a transcript of Kuehn’s grades would be an act

to collect the discharged debt and would violate both

the automatic stay and the discharge injunction. See

In re UAL Corp.

B

Bankruptcy Code creates or alters property rights in

grades or the right to receive a transcript. Other federal

law addresses privacy concerns but not property

interests. See 20 U.S.C. §1232g (Family Educational

Rights and Privacy Act). What remain are state statutes

and common law. See

, 408 U.S. 564, 577 (1972).

property does not give students property rights in transcripts.

Montana defines property ownership as “the

right of one or more persons to possess and use [a thing]

to the exclusion of others”. Mont. Code §70-1-101. The

court concluded that because a university creates, maintains,

and possesses the grade record to the exclusion of

others it is the owner of the official transcript. The ninth circuit’s conclusion is questionable. Universities in

Montana are limited by both state and federal law

in what they can do with a student’s grades. Mont. Code

§20-25-515 says that a university “shall release a

student’s academic record . . . when requested by the

student”. This sounds like a rule that the student has a

property interest in the information, even though the

school also may use the data. (Shared property rights

are common. Both landlord and tenant have property

interests in the premises. Or think of land subject to

an easement for transit.) But, right or wrong,

Wisconsin, whose law does not define property rights

in the same way as Montana.

Wisconsin courts have not considered whether a

student has a contract or property right to receive

a transcript. No Wisconsin statute is on point. Under

Wisconsin common law, property rights may arise from

custom and usage. See

, 42 Wis. 214 (Wis. 1877) (riparian water rights);

have consistently provided transcripts at or

around cost. A transcript currently sets students back $4

at Cardinal Stritch University, $3 at Harvard University,

and nothing at the University of Chicago if delivered

electronically (otherwise $12). Fees at other universities

are similar. We could not find any case in any court

where a university had asserted that it could charge a

student more than cost for a transcript, and, as far as we

can tell, no university has ever tried to profit by charging

a fee based on the transcript’s effect on a student’s

future income. This custom is similar to those in

Delaplaine

the students and colleges to be joint owners of the data

reflecting grades, because that is how the educational

contract is routinely understood.

A longstanding custom or practice does not prevent

change. For example, airlines used to carry checked

baggage without a fee. But nobody, including the

Supreme Court of Wisconsin, would conclude that

United Airlines is depriving passengers of their property

when it now charges for checked bags. The cost

of checking baggage is determined by contractual

rights that can be altered by the parties. Cardinal Stritch

University could announce to future students that transcript

fees would reflect the value of the education. But

the University did not say any such thing to Kuehn

when she enrolled, or even when she graduated, and it

can’t change the terms of a contract after the fact e

when those terms are implied rather than express.

Kuehn’s property right might be limited to her grades, an

intangible right similar to the right in a name or

likeness, see

, 90 Wis. 2d 379, 280 N.W.2d 129 (Wis. 1979), and not include a rightHirsch the Wisconsin Supreme Court relied on the

to receive a transcript from the University certifying

those grades. But the custom of universities has been to

provide certified transcripts, and for good reason. Intangible

grades are worthless without proof. Kuehn’s school

district increases compensation only after it receives a

certified transcript. Other employers have similar policies.

In

property right in a football player’s nickname to conclude

that the tort of misappropriation was available at common

law. It reasoned that the tort was necessary to give value to

the property right.

Mass. 599, 97 N.E. 109 (Mass. 1912) (a letter writer has a

right to receive copies of a letter owned by another in

order to give value to the writer’s common-law property

interest in the contents of the letter). That reasoning

applies equally here. A right to receive a certified copy

of a transcript is essential to a meaningful property right

in grades.

That a student has a right to a copy of the transcript does

not leave educational institutions without the means to

collect tuition. The University is unable to collect

Kuehn’s tuition only because it was careless. When Kuehn

failed to pay her mounting bills the University could have

refused to let her enroll in new classes. It could have

refused to let her take exams. It could have refused to

award a degree. Or the University could have required

Kuehn to borrow from a third party to pay for her education.

Student loans are not dischargeable unless a debtor

can show undue hardship, see 11 U.S.C. §523(a)(8), and

it is unlikely that Kuehn could have shown undue hardship.

She was gainfully employed, and her debt to the University was substantially less than the extra income

the master’s degree afforded. Presumably the University

will protect itself in one or more of these ways in the

future.

Giving weight to custom that amounts to an implicit

term of the educational contract, and following the reasoning

in

right to receive a certified copy of her transcript. The

University’s refusal to honor that right until Kuehn paid

her back tuition was an act to collect a debt and thereby

violated the automatic stay and discharge injunction.

a certified transcript is part of the package of goods and

services that a college offers in exchange for tuition?

Property interests are created and defined by state law

unless a federal law requires a different result.

Well, then, does Kuehn have a property interest becauseHirsch, we conclude that Kuehn has a state-lawId. at 383. See also Baker v. Libbie, 210Hirsch v. S.C. Johnson & Son, Inc.

ven

it is impossible to say more that the state judiciary would deemKeogh v.Daniell, 12 Wis. 163 (Wis. 1860) (movable fixtures). Universities

Delaplaine v. Chicago & N.W. Ry.Juras is unhelpful Cardinal Stritch University is located in

Juras v. Aman Collection Service, Inc., 829 F.2d 739 (9th Cir. 1987), concluded that Montana’s statutory definition of

Only one federal court of appeals (and no state supreme

court) has considered whether a current or former

student has a property right to receive a transcript.

Board of Regents v. Roth utner v. United States, 440 U.S. 48, 55 (1979). Nothing in the

In re Kmart Corp.the two items are not of similar character, see Strumpf

Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995), No. 07-3954 5

yet that debt has been discharged. The University contends that

and unable to obtain a

even

the University refused because she owed more than $6,000 in tuition.

the proof necessary to receive an

Can a chapter 7 debtor voluntarily dismiss her own case?

admin — Thu, 23 Apr 2009 21:45:42 +0000

Case Synopsis:

This opinion was issued by Judge Squires on April 22, 2009. In this case, the debtor filed a chapter 7 bankruptcy with the mistaken belief that her home was “exempt” and protected even though there was approximately $140,000 in equity. Once the trustee started the process to sell the house for the benefit of creditors, the debtor filed a motion to dismiss the case. Judge Squires adopted the rule that the court should balance the interests of the debtors and creditors when considering whether to grant a debtor’s motion to dismiss a chapter 7 case. The factors to be considered are:

whether dismissal is in the best interest of the debtor;
whether dismissal is in the best interest of the creditors;
whether dismissal would result in an abuse or manipulation of the system;
whether dismissal is justified by compelling equitable principles.

The motion to dismiss was denied even though the debtor promised to pay her creditors in by borrowing money from family. Judge Squires was not satisfied that the debtor’s plan to repay her creditors using family contributions would be successful.

Interestingly, chapter 7 trustee withdrew his objection because the debtor waived her discharge and agreed to pay the trustee’s administrative expenses. The debtor could have converted her case to chapter 13 under Section 706(a).

Below is the opinion

United States Bankruptcy Court

Judge: John H. Squires

SUSAN GLENN HOPPER,

Debtor.

Judge John H. Squires

MEMORANDUM OPINION

This matter comes before the Court on the motion of Susan Glenn Hopper (the

“Debtor) to voluntarily dismiss her Chapter 7 case pursuant to 11 U.S.C. § 707(a) and on the

objection of David R. Brown, the Chapter 7 case trustee (the “Trustee”). After the Court

took this matter under advisement and a few days before issuance of this Opinion, the Debtor

executed a waiver of her discharge subject to the dismissal of the case and payment of

administrative expenses. On April 17, 2009, the Debtor and the Trustee consented to the

dismissal of the case, and the Court entered an order of dismissal, but reserved issuance of

this Opinion on the instant motion in order to explain its findings and conclusions. The

Court finds that the Debtor does not have a right under § 707(a) to voluntarily dismiss her

Chapter 7 case by merely alleging a lack of prejudice to her creditors over the Trustee’s

objection. The Debtor’s voluntary waiver of discharge effectively reduces the prejudice to

her creditors to only the attendant delay in the collection of their claims as a result of the

automatic stay of 11 U.S.C. § 362.

I. JURISDICTION AND PROCEDURE

The Court has jurisdiction to entertain this matter pursuant to 28 U.S.C. § 1334(a)

and Internal Operating Procedure 15(a) of the United States District Court for the Northern

District of Illinois. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) & (O).

II. FACTS AND BACKGROUND

The Debtor owned and operated a home and garden store, as a sub-chapter S Illinois

corporation, under the name of Susan Hopper Creations, Inc., d/b/a Flora & Fauna (“Flora

& Fauna”) in Geneva, Illinois. Over a period of six years, the Debtor alleges that she

withdrew approximately $130,000 from her IRA accounts to pay the ordinary and necessary

business expenses of Flora & Fauna and to pay personal expenses. The IRA withdrawals

resulted in tax penalties for early withdrawal. The Debtor elected to close Flora & Fauna

on September 30, 2008.

The Debtor filed a Chapter 7 bankruptcy petition, schedules, and a statement of

financial affairs on December 10, 2008. The Trustee was thereafter appointed. The Debtor

had not previously filed for relief under the Bankruptcy Code. According to the Debtor,

prior to the filing, no judgments had been entered against her, no suits were pending, and

none of her creditors had taken any action to collect their debts against her other than in the

ordinary course of business. At the time of the bankruptcy filing, the Debtor was represented

by counsel. The Debtor listed her personal residence at 1430 Saddleridge Place in Bartlett,

Illinois as an asset on Schedule A and as property claimed as exempt on Schedule C. The

Debtor’s Schedules indicate the current market value of the property is $400,000 with a

secured claim in the amount of $260,929.45. On Schedule C an exemption on the property

is claimed in the amount of $15,000. The Debtor alleges that of her $151,000 in scheduled

unsecured debt, only $26,700 represents her personal obligation, in addition to the IRA

penalty of $10,600 and liability to the Illinois Department of Revenue for sales tax of

$4,100. The Debtor alleges that the scheduled debt of $24,400 on three credit cards held in

her name and the remainder of the scheduled debt, approximately $84,400, is the

responsibility of Flora & Fauna. The Debtor contemplates a separate Chapter 7 petition

being filed on behalf of Flora & Fauna in order to liquidate its obligations. A creditors’

meeting was held on January 20, 2009, at which time the Debtor appeared and testified.

There are no pending objections to discharge, objections to the Debtor’s claimed

exemptions, or other contested matters in this case.

On March 6, 2009, the Debtor moved for voluntary dismissal of her Chapter 7 case

and requested that the Trustee not execute a listing agreement for her residence until

adjudication of her motion. The Debtor alleges that she filed for bankruptcy on the basis of

a mistaken belief that her residence would be completely exempt. The Debtor argues that

if she had been fully aware of the loss of her residence through the filing of the petition, she

would not have filed the case. According to the Debtor, since the filing of the case, she has

continued to pay the first mortgage and home equity line of credit on her residence. The

Debtor alleges that since the filing of the petition, she has sought employment and contacted

family members to provide loans in order to resume payment of her personal debt as

contained in the Schedules. The Debtor seeks to satisfy her creditors outside of the

The Debtor also has the option to convert the case to Chapter 13 and pay the

amount of equity in the house to unsecured creditors over three to five years. The

Bankruptcy Code allows a debtor to convert a case from Chapter 7 to Chapter 11, 12, or 13

at any time as long as the case was not previously converted from another chapter. 11

U.S.C. § 706(a). A debtor’s right to convert is absolute in the absence of extreme

circumstances “amounting to bad faith, imposition on the Court’s jurisdiction, abuse of

process, or other gross inequity. . . .”

In re Spencer

, 137 B.R. 506, 514-15 (Bankr. N.D.

Okla. 1992). Significantly, no such conversion was sought here by the Debtor.

bankruptcy process.

The Trustee objects to the dismissal on the basis that a Chapter 7

debtor does not have an absolute right to dismiss the bankruptcy case. The Trustee argues that creditors will be prejudiced by the dismissal, and the sale of the Debtor’s residence is the only way that creditors will be satisfied. The Debtor argues that her creditors will not be prejudiced by the dismissal because they will be returned to the status quo that they held before the bankruptcy filing.

III. DISCUSSION

A Chapter 7 case can only be dismissed for “cause” under 11 U.S.C. § 707(a).

In re  Watkins

, 229 B.R. 907, 908 (Bankr. N.D. Ill. 1999). A Chapter 7 debtor does not have an

absolute statutory right to voluntarily dismiss a Chapter 7 bankruptcy petition like a Chapter

13 debtor has under 11 U.S.C. § 1307(b). Section 707(a) provides as follows:

(a) The court may dismiss a case under this chapter only after notice and a hearing and only for cause, including–

(1) unreasonable delay by the debtor that is prejudicial to creditors;

(2) nonpayment of any fees and charges required under chapter 123 of title 28 [28 U.S.C. §§ 1911 et seq.]; and

(3) failure of the debtor in a voluntary case to file, within fifteen days or such additional

time as the court may allow after the filing of the petition commencing such case, the

information required by paragraph (1) of section 521, but only on a motion by the

United States trustee.

11 U.S.C. § 707(a). Thus, a debtor does not have an absolute right to dismiss a Chapter 7

case even if begun on a voluntary petition.

Turpen v. Eide (In re Turpen) , 244 B.R. 431, 434 (B.A.P. 8th Cir. 2000);Leach v. United States (In re Leach) , 130 B.R. 855, 857 n.5 (B.A.P. 9th Cir. 1991); Watkins, 229 B.R. at 908; In re Haney , 241 B.R. 430, 432 (Bankr. E.D. Ark. 1999). Schwartz v. Geltzer (In re Smith) , 507 F.3d 64, 72 (2d Cir. 2007);  Turpen, 244 B.R. at 434; Watkins , 229 B.R. at 909. Federal Rule of Bankruptcy Procedure 1017(a) mandates that a motion for dismissal by a debtor must be predicated on cause and may only be granted after notice and a hearing. FED. R. BANKR . P. 1017(a).Indus. Ins. Servs., Inc. v. Zick (In re Zick) , 931 F.2d 1124, 1126 (6th Cir.

1991);

Watkins, 229 B.R. at 908; Kirby v. Spatz (In re Spatz) , 221 B.R. 992, 994 (Bankr. M.D. Fla. 1998). The decision whether to grant a motion to dismiss a Chapter 7 case lies within the discretion of the bankruptcy court.   Peterson v. Atlas Supply Corp. (In re Atlas Supply Corp.) , 857 F.2d 1061, 1063 (5th Cir. 1988); Eastman v. Eastman (In re Eastman), 188 B.R. 621, 624 (B.A.P. 9th Cir. 1995); Turpen, 244 B.R. at 433. A Chapter 7 trustee has standing to oppose a debtor’s request for dismissal.   In re Stephenson , 262 B.R. 871, 873 n.1 -7-

The Debtor urges the Court to adopt the test for voluntary dismissal set forth in

In re Geller , which sets a lower threshold and provides that a request for voluntary dismissal

should generally be granted “in all but extraordinary situations” unless a creditor shows that

“plain legal prejudice” to creditors would result. 74 B.R. 685, 690 (Bankr. E.D. Pa. 1987).

The

Geller case, which reviewed dismissal motions under both §§ 707 and 1112(b), has been

criticized by courts in several subsequent decisions.

See Jabarin , 395 B.R. at 340 n.18 (continued…)Watkins , 229 B.R. at 908.

In construing § 707(a), courts have refused to dismiss a Chapter 7 case where the

dismissal would cause some plain legal prejudice to the creditors.

In re Higbee,

58 B.R. 71, 72 (Bankr. C.D. Ill. 1986). “If dismissal would prejudice the creditors, then it willAtlas Supply, 857 F.2d at 1063; see also In re Harker

ordinarily be denied.”

, 181 B.R. 326, 328 (Bankr. E.D. Tenn. 1995) (“[I]f creditors are prejudiced in any respect by the dismissal or if the trustee has acquired funds for distribution, a request by the debtor for dismissal will be denied.”). Legal prejudice is found to exist where assets which would otherwise be available to creditors are lost because of the dismissal. In re McCullough , 229 B.R. 374, 376 (Bankr. E.D. Va. 1999); Higbee, 58 B.R. at 72. Delay in satisfying creditors’ claims can be sufficient to preclude dismissal. Turpen, 244 B.R. at 435; Watkins, 229 B.R. at 909.

The debtor has the burden of proving cause for voluntary dismissal of the Chapter 7 petition.

In re Jabarin , 395 B.R. 330, 337 (Bankr. E.D. Pa. 2008). Even if the debtor can show cause,

the court may deny the motion if there is a showing of prejudice to creditors.   Turpen , 244  B.R. at 435. Thus, in order for a debtor’s motion to dismiss to be granted, the debtor must Geller plain legal prejudice test is “not consistent with the substantial body of case law that has developed under § 707(a) for assessing voluntary motions to dismiss chapter 7 bankruptcy cases. . . .”);  In re Mech. Maint., Inc., 128 B.R. 382, 388 (Bankr. E.D. Pa. 1991) (finding that the Geller court’s interpretation requiring the creditor to demonstrate “plain legal prejudice” was in error). This Court declines to follow Geller’s authority for the proposition that a debtor’s request for a voluntary dismissal of the Chapter 7 case should be granted “in all but extraordinary situations.” 74 B.R. at 690. constitute such cause, nor does debtor’s right to convert to Chapter 13 of the Bankruptcy Code.”  requires a balancing of the interests of the debtor and the creditors. Id.; see also Hickmanv. Hana (In re Hickman), 384 B.R. 832, 841 (B.A.P. 9th Cir. 2008) (stating that “the totality of the circumstances” should be considered in evaluating cause for dismissal and plain legal prejudice). Courts have considered the following general factors when determining whether there is sufficient cause to justify dismissal: (1) whether dismissal is in the best interest of the debtor; (2) whether dismissal is in the best interest of the creditors; (3) whether dismissal would result in an abuse or manipulation of the system; and (4) whether dismissal is justified by compelling equitable principles.  , 58 B.R. 923, 925-26 (Bankr. S.D.N.Y. 1986).Turpen , 244 B.R. at 434. “While these questions may inform the § 707(a) inquiry into whether ‘cause’ exists for voluntary dismissal, they are questions that are not best answered in the abstract. Rather, they should be resolved on a case-by-case basis in the context of the specific facts presented.”  Jabarin, 395 B.R. at 341. “In its simplest terms, the test turns on whether or not the dismissal is in the best interests of the debtor and the creditors of the estate, . . . with particular emphasis on whether the dismissal would be prejudicial to creditors.” In re Aupperle , 352 B.R. 43, 46 (Bankr. D.N.J. 2005). “In deciding whether to

exercise its discretion and grant a Chapter 7 debtor’s motion to dismiss the debtor’s case, the

court’s primary consideration is whether dismissal is in the best interest of the creditors and

also if those interests will be protected outside bankruptcy.”

Courts are not impressed with complaints of attorney negligence, lack of representation, or errors in judgment by debtors when considering motions for voluntarily dismissal.

In re Haque , 256 B.R. 352, 354 (Bankr. D. Mass. 2000).See In re Klein, 39 B.R. 530 (Bankr. E.D.N.Y. 1984) (denying motion to dismiss

In re Martin, 30 B.R. 24 (Bankr. E.D.N.C. 1983) (denying motion to

, 19 B.R. 300 (Bankr. D.Me. 1982) (denying motion to dismiss where debtors failed to read the petition which contained false information because they believed their attorney “would do nothing which wasn’t right for them”); In re St. Laurent , 17 B.R. 768 (Bankr. D.Me. 1982) (denying motion to dismiss because mistaken belief by debtor and her counsel that she could retain all assets as exempt and receive discharge of all her dischargeable debts was not cause under § 707(a)).Cohara, 324 B.R. at 27; Turpen , 244B.R. at 434;

221 B.R. at 994.

That position is based upon the House and Senate Reports on this provision which state:

The section does not contemplate, however, that the ability of the debtor to repay his debts in whole or in part constitutes adequate cause for dismissal. To permit dismissal on that ground would be to enact a non-uniform mandatory chapter 13 in lieu of the remedy of bankruptcy.

H.R.R EP.NO. 95-595, at 380 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963, 6336; S.REP. NO. 95-989, at 94 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 5880. Thus, “[i]t is well

Spatz, 221 B.R. at 994.

established and supported by the [l]egislative [h]istory that the fact that a debtor is willing and able to pay his debts outside of bankruptcy does not constitute adequate cause for dismissal under section 707(a)[.]”

Some courts have held that the legislative history of § 707(a) does not apply when

it is the debtor, as opposed to the creditor or another party who seeks dismissal on the

grounds of ability of the debtor to repay debts outside the bankruptcy process.

Smith , 507 F.3d at 73; Aupperle , 352 B.R. at 47 (“[T]he entire excerpt [of legislative history] refers to circumstances justifying cause for involuntary dismissal sought by a party other than theSmith, this does not mean that a debtor’s

ability to repay debts is per se grounds for dismissal; rather, the significance of the debtor’s

ability to pay is merely a part of the required inquiry into whether dismissal would be in the

best interest of all parties in interest. 507 F.3d at 74.

To succeed on her motion, the Debtor must show cause and demonstrate whydismissal is justified.

See Turpen, 244 B.R. at 434. The Debtor seeks to dismiss because of

a mistaken belief that her residence would be completely exempt. The Debtor additionally

claims to have the ability and intent to pay her creditors outside the context of the

bankruptcy case. The Court does not find these arguments persuasive. First, the Debtor’s

mistaken belief that she could retain her residence and a receive a discharge of all her

dischargeable debts does not constitute “cause” within the meaning of § 707(a). See St.

Laurent, 17 B.R. at 770. “Having voluntarily submitted herself and her assets to the

jurisdiction of the Bankruptcy Court, the [Debtor’s] regret over that decision . . . does not

constitute ‘cause’ justifying dismissal of her case.”

Second, the ability of the Debtor to pay her debts does not constitute cause for dismissal.

In re Taylor, No. 01-84995, 2002 WL 32001700, at *2 (Bankr. C.D. Ill. Mar. 27, 2002).

, 324 B.R. at 27. The Debtor filed for bankruptcy relief because she

was unable to pay her debts. The Debtor’s Schedules do not show that she has the ability

to pay her debts outside of bankruptcy. Significantly, this is not a case where the Debtor has

established an additional source of income to assist with her debts.

at 46, 48 (finding sufficient cause to warrant dismissal where it was the debtor’s first

bankruptcy filing, there were no pre-petition collection efforts, the debtor was unaware that

she might lose her residence through the Chapter 7 bankruptcy filing, the debtor had

established an additional source of income to assist with her debts, and there was an

insufficient basis in the record to conclude that creditors would be prejudiced by the

dismissal). It is not at all clear that any sources of funding alleged by the Debtor (i.e., family

gifts) will allow her to pay her debts outside of bankruptcy. The Debtor’s allegations that

she has “sought employment” and “contacted family members” are not reliable evidence of

any additional income or a change in her circumstances. The Debtor has not presented a

concrete or viable plan for paying her creditors outside of bankruptcy.

324 B.R. at 29 (reversing the bankruptcy court’s decision granting the motion to dismiss where debtor In re Hull, 339 B.R. 304 (Bankr.

failed to present a detailed plan concerning how she would use her non-exempt settlement

annuity to pay creditors outside of bankruptcy).

Finally, the Debtor’s reasons for dismissal do not outweigh the prejudice that would

result to her creditors. The Debtor, citing the case

E.D.N.Y. 2006), argues that creditors are generally not prejudiced by dismissal because theyId. at 309. Hull involved a pro se debtor who had a potential personal injury claim

will no longer be stayed from resorting to the state courts to enforce and realize upon their

claims.

that she had not scheduled as an asset. Id. at 306. The potential claim was the bankruptcy

estate’s only asset and if successful may have provided a distribution to the debtor’sd. However, the value of the claim had not been determined and it was unknown

creditors. I

whether an action on the claim had been commenced.Id at 309. The debtor also had

concerns for her personal safety which required her to relocate outside the district.

Id. at 308. The court considered the “reasonable pre-petition legal expectations and entitlementsId. at 309.

of a debtor’s creditors” and found that under the circumstances, the interests of the creditors

would not be prejudiced by dismissal despite the loss of an opportunity to receive a

distribution that only existed because of the bankruptcy process.

In this case, the Debtor’s residence was not an unscheduled, speculative asset. TheSee id. It is the perceived non-exempt portion of the equity in the Debtor’s residence that the Trustee seeksSee In re Baumgarten, 154 B.R. 66, 69 (Bankr. S.D. Ohio 1993). One consummated sale by the Trustee using the bankruptcyFulton, 339 B.R. at 701; see also In re Cink, No. 06-40019, 2007 WL 601585, at *3 (Bankr. D.S.D. Feb. 21, 2007) (stating

value of the property was listed, and the Debtor was represented by counsel at the time the

petition was filed. The Trustee’s arguments and objections are based on the “ reasonable

pre-petition legal expectations and entitlements” of the Debtor’s creditors.

to realize through a sale and pay the creditors’ allowed claims.

According to the Debtor, if the case is dismissed and each creditor obtained a

judgment against her, which later would result in liens against her residence, each creditor

may be satisfied in full from a sale of the property outside of the bankruptcy process. Here,

however, the sale of the Debtor’s residence outside of the bankruptcy process is not

guaranteed to occur. There is no assurance that if a sale occurs, the proceeds will be used

for the benefit of the Debtor’s unsecured creditors. If a dismissal is granted, the Debtor will

remain subject to all creditors’ individual collection remedies that exist under nonbankruptcy

law. This may result in a reordering of priorities or delays in payments. This is not cause

to dismiss the case, but is grounds for retaining jurisdiction so the creditors may be assured

of an equitable distribution of the Debtor’s assets.

process is certainly more efficient than multiple separate creditor execution sales.

“Absent court oversight of payment [of creditors by the debtor], creditors are

prejudiced. They bear the risk of not being paid, a very unlikely risk in a chapter 7 case.

The method for insuring payment of creditors out of any non-exempt portion of the estate’s

assets is through administration under the trustee system.”

that creditors are “entitled to full payment of their allowed claims to the extent estate fundsSee Turpen, 244 B.R. at 434.Maixner v. Surratt-States (In re Maixner), 288 B.R. 815, 818 (B.A.P 8th Cir. 2003). The Trustee’s proposed sale of the Debtor’sSee In re Szekely, 936 F.2d 897 (7th Cir. 1991). The Debtor seeks to terminate the potential bankruptcySee Jabarin, 395 B.R. at 343.

are available. Anything less is prejudicial to creditors. The statutory duty to insure an

appropriate distribution lies with Trustee. . . .”). The Debtor’s creditors will be prejudiced

by dismissal of this case, and they have already been stayed in their collection remedies via

11 U.S.C. § 362(a). The Debtor has limited income and resources and there is no guarantee

that creditors will receive payment outside of the bankruptcy process. The Debtor’s vow

to pay her creditors in the future does not dispel such prejudice.

Moreover, the Debtor’s desire to save the equity in her home to the detriment of her creditors is not grounds for a voluntary dismissal.

residence appears to represent the creditors’ best opportunity for obtaining satisfaction of

their claims. The cause asserted by the Debtor for dismissing her case is the fear that she

will lose her residence if the case is not dismissed and the Trustee is permitted to pursue the

sale of the property. She is only entitled to her homestead exemption, not the residence

itself, which is part of the bankruptcy estate under 11 U.S.C. § 541. It is the equity that may

be realized from the potential sale of the residence, after satisfaction of the homestead

exemption claim and unavoidable liens encumbering the residence, with which the Trustee

seeks to pay administrative priority and other allowed unsecured claims.

administration of the estate’s assets, but she has not presented any credible source for paying

her creditors outside of bankruptcy. In these circumstances, the balance of competing

interests tips in favor of the creditors.

IV. CONCLUSIONFor the foregoing reasons, the Debtor’s motion is insufficient in light of the Trustee’s

objection. However, she has waived her discharge and the Trustee has consented to the

dismissal of the case on the condition of payment of the agreed administrative expenses.

This Opinion constitutes the Court’s findings of fact and conclusions of law in

accordance with Federal Rule of Bankruptcy Procedure 7052.

See Cohara,

See Aupperle, 352 B.R.

See Cohara

even though debtor asserted he was not fully advised of the implications of commencing a bankruptcy case);  dismiss because the debtor was represented by counsel despite her assertion that counsel failed to explain the effects of filing a bankruptcy petition);

Watkins, 229 B.R. at 909. Determining whether cause exists to dismiss a case

See Watkins, 229 B.R. at 909; In re Schwartz

show adequate “cause” per § 707(a) and that such dismissal will cause no prejudice to

creditors.   at 434-35.

Sicherman v. Cohara (In re Cohara), 324 B.R. 24, 28 (B.A.P. 6th Cir. 2005);

Bankruptcies of the Rich and Famous

admin — Wed, 22 Apr 2009 02:26:38 +0000

BERNIE KOSAR

Former NFL quarterback Bernie Kosar was known for his intelligence on the football field. Unfortunately he did not display the same acumen for real estate investing. Kosar lead the Miami Hurricanes to a national championship in 1984. He later lead the Cleveland Browns to the AFC Championship game. Kosar retired after back-up roles for the Cowboys and Dolphins. In addition to the collapse of his real estate investments, Kosar’s restaurant in South Florida closed in 2008. Kosar was a co-owner of the arena football team in Cleveland called the Gladiators. The AFL did not play its 2009 season due to the poor economy. Kosar’s bad luck in business coupled with an expensive divorce lead him to bankruptcy court in June 2009. Kosar’s attempt to reorganize his affairs in chapter 11 ultimately failed. His case was converted to chapter 7 in January 2010

DOROTHY HAMILL

Olympic Gold Medal ice skater Dorothy Hamill, who invented the Hamill camel, was not immune to financial strife. She once described “money as evil” when she explained how she had to learn difficult lessons about fame. Even with her great success on and off the ice, she came into difficult times and made a choice to file for bankruptcy in 1996. Nonetheless, she was inducted into the World Figure Skating Hall of Fame in 2000.