Author: Hale Andrew Antico

Hale Andrew Antico is a recognized bankruptcy attorney and an award-winning two-term past President of cdcbaa, the largest association of Los Angeles bankruptcy lawyers representing debtors. Prior to that, he served as President of the Southern California Bankruptcy Inn of Court. He is humbled to have been voted #1 Best Bankruptcy Attorney four times, and has a proven record helping thousands of people get a fresh start over two decades.
Innocent spouse in bankruptcy fraud and the Bartenwerfer case

Innocent Spouse, Bankruptcy, and Fraud.. oh my – Bartenwerfer

Innocent Spouse, Bankruptcy, and Fraud.. oh my – Bartenwerfer

Can the fraud of one spouse be imputed to an innocent spouse, thereby making the debt nondischargeable to both in a bankruptcy? Meet the Bartenwerfer family.

2023 update: this case is pending before the SCOTUS in 2023.

The Supreme Court Case of Bartenwerfer v. Buckley

The Supreme Court is set to rule on this very issue in 2023. This is an appeal of a bankruptcy case with an innocent spouse whose husband was found liable for prepetition nondisclosure which turned into a bankruptcy court finding of nondischargeable fraud.

The basic facts are that Mr. Bartenwerfer (Debtor) sold a house to Mr. Buckley (Creditor), who then later found a bunch of undisclosed defects on the remodeled home. In fact, Debtor signed a statutory transfer disclosure statement which contained false representations that Creditor relied upon. Creditor sues. After three years at trial, a jury found Debtor liable for, among other things, nondisclosure of the defects. The jury also awarded Creditor, after reduction, about $250,000 in damages.

Debtor then filed Chapter 7 bankruptcy, and to the surprise of nobody, Creditor followed him into the bankruptcy and filed and succeeded with a motion to have the nondisclosure portion of his quarter-million dollar judgment found nondischargable per 11 USC 523(a)(2)(A).

The bankruptcy court then made a specific ruling in favor of Mrs. Bartenwerfer — Debtor’s spouse — was not liable for the debt. This was based on the facts that she didn’t live at the property after the renovations, she didn’t visit it again until Debtor and Creditor met there to sign the disclosure statement. The court also found she never spoke with the laborors, and had an agreement her Debtor husband that Debtor would assume responsibility and make it his full-time job to supervise the renovations. In re Bartenwerfer, 596 BR 675, 685-686 (NDCA, 2019)

Innocent spouse in bankruptcy fraud and the Bartenwerfer case
An innocent spouse should not be liable for the fraud of their spouse if they didn’t know about it

The Split on Standards for Imputed Fraud to a Spouse

SCOTUS is Strang: Fraud imputed without benefit or knowledge

There are a few ways courts have approached this. One approach, the most absolute and the strictest, is that any agency imputes the fraud to others in the partnership.

We start with the Supreme Court case of Strang v. Bradner, 114 US 555 (1885). Here, there was a business partnership involving wool consignment. The SCOTUS determined that one of the partners had committed fraud, and that was not discharged in bankruptcy. Turning then to whether the partner should also be held liable, it ruled that “we are of opinion that his fraud is to be imputed, for the purposes of the action, to all the members of his firm.” Id. at 561.

The Supremes went on: “…if, in the conduct of partnership business, and with reference thereto, one partner makes false or fraudulent misrepresentations of fact to the injury of innocent persons who deal with him as representing the firm, and without notice of any limitations upon his general authority, his partners cannot escape pecuniary responsibility therefor upon the ground that such misrepresentations were made without their knowledge.” Id.

Clearly, the Supreme Court back in 1885 considered the partnership business as one in which conscious decisions are made with regard to financial and pecuniary agency, and “…especially so when, as in the case before us, the partners, who were not themselves guilty of wrong, received and appropriated the fruits of the fraudulent conduct of their associate in business.” Id. While the SCOTUS discussed “fruits of the fraud” and benefits, other courts have ignored this as if it were dicta.

Strang was followed by the Fifth Circuit, when it held “that innocent partners were precluded from discharging debts generated by their partner’s fraud even if they did not benefit monetarily from the fraud.” In re M.M. Winkler & Assocs, 239 F.3d 746, 748 (5th Cir.2001).” The 5th Circuit continued: “we hold that §523(a)(2)(A) prevents an innocent debtor from discharging liability for the fraud of his partners, regardless whether he receives a monetary benefit.” Id. at 751.

There are other interpretations of this, which has led to some Strang bedfellows.

Sixth Circuit: Receipt of Benefits

A different standard involves benefiting from the fraud. Following Strang, and including as a requirement its language of “fruits of the fraudulent conduct” — that is, benefit from the fraud — is the Sixth Circuit. There, the Circuit Court held that “[T]he fraud in Strang was perpetrated within the scope of the partnership’s business, and, as in the case at bar, the innocent partners received the fruits of the fraudulent conduct.” In re Ledford, 970 F.2d 1556, 1561 (6th Cir. 1992).

Again, in Ledford as in Strang, we have a business case where partners made a conscious decision to be bound by each other’s financial gains, losses, and wrongdoing.

Eighth and Ninth’s Huh and Walker: Knew or should have Known

The Ninth Circuit had adopted a standard that “more than a principal/agent relationship is required to establish a fraud exception to discharge. While the principal/debtor need not have participated actively in the fraud for the creditor to obtain an exception to discharge, the creditor must show that the debtor knew, or should have known, of the agent’s fraud. ” Sachan v. Huh (In re Huh), 506 B.R. 257, 271-272 (9th Cir BAP, 2014).

This reasonable standard adopted from a long-established case in the the Eighth Circuit: “If the principal either knew or should have known of the agent’s fraud, the agent’s fraud will be imputed to the debtor-principal.” In re Walker, 726 F.2d 452,454 (8th Cir. 1984).

Back to Bartenwerfer

The Standards Used by Courts in Bartenwerfer

With that review of standards, what happened in Bartenwerfer? Creditor appealed to the Ninth Circuit BAP, who remanded, asking the bankruptcy court to determine if spouse Mrs. Bartenwerfer was liable for the nondisclosure of defects using the “knew or should have known” standard in Walker v. Citizens State Bank, 726 F.2d 452 (8th Cir 1984). There was an evidentiary hearing, and a finding that Mr. Bartenwerfer’s fraud could not be imputed onto Mrs. Bartenwerfer because she did not know of the fraud. In re Bartenwerfer (9th Cir BAP NC-19-1016-TaFB, 2020). Citing Walker, the BAP wrote that the “bankruptcy court did not err in its determination that Mr. Bartenwerfer’s fraud cannot be imputed to Mrs. Bartenwerfer.” Id. at 11.

In the appeal to the Ninth Circuit Court of Appeals, the 9th Circuit abandoned Huh and Walker, and held that the absolute “basic partnership principles” and that the SCOTUS strict agency precedent should make Mrs. Bartenwerfer liable for the nondisclosure of the defects. In re Bartenwerfer (9th Cir, 2021). The Ninth Circuit treated a the unknowing spouse like a business partner, and applied the formal agency standard to her, citing Strang, as well as In re Cecchini, 780 F. 2d 1440 (9th Cir, 1986).

Which puts the case before the Supreme Court, where in late January 2023, it has agreed to review the issue.

Strang should be limited to business agency

Strang is a business case, and it should not be extended to marriages. There is precedent for this balanced approach.

The Eight Circuit in 2001 followed the 11th Circuit in limiting the applicability of strict Strang to only business agency. “We agree with the Eleventh Circuit that Strang should not be extended beyond its basis in agency law to include the much broader sweep of § 20(a) liability.” Owens v. Miller, 276 F.3d 424 (8th Cir. 2001), citing Hoffend, 261 F.3d at 1153. If the spouse knew or should have known, then the Huh and Walker standard of liability would apply. This is the right balance and approach.

It seems to be a stretch to apply partnership agency standards of imputing fraud to a marriage, particularly when there is an innocent spouse who does not meet the “knew or should have known” standard. In a business venture, both partners go into business and willingly realize and take the risk that there will be contracts, statements, and agreements. Both are savvy and assume these risks, gains, and losses.

In a marriage, there is often one spouse much more knowledgeable in various topics, whether it’s keeping the checkbook or running the family business. When spouses say “I do,” while agreeing to love in sickness and health, the spouses are not knowingly agreeing to assume the burden of imputed fraud when their spouse secretly does wrong and commits fraud. Marriage is not a business partnership.

It’s hoped that the Supreme Court in reviewing the issue and appeal from the 9th Circuit follows the logic and common sense of the 9th Circuit BAP, Walker, and Owens, and refrains from creating new obligations in marriages that harm innocent spouses for the fraud of the other.

Absolute Right to Dismiss Chapter 13 is a Happy Green Light

9th Cir BAP: Actually, Absolute Right to Dismiss means Absolute

9th Cir BAP: Actually, Absolute Right to Dismiss means Absolute

Ninth Circuit Bankruptcy Appellate Panel finds no “eligibility” exception to right to dismiss a Chapter 13 bankruptcy

Recent BAP ruling answers the question if debtor’s right to dismiss a Chapter 13 bankruptcy after Nichols is absolute, or if debt limit ineligibility restricts it.

In re Powell is a recent Chapter 13 bankruptcy where the debtor tried to dismiss his case, and judgment creditor TICO fought the dismissal. and instead wanted Debtor’s case converted to Chapter 7. The Bankruptcy Court granted the motion to dismiss, citing the recent Nichols case.

Powell vs TICO Construction (In re Powell)
644 B.R. 181 (9th Circuit BAP, 2022)

ISSUE

Did the bankruptcy court err in granting Debtor’s motion to dismiss the Chapter 13?

RULING

No.

FACTS

This case tests the new “absolute right to dismiss” rule about Chapter 13 bankruptcies from the Ninth Circuit Court of Appeals Nichols case, and whether it applies even to people who could only file 7 and had no business in a Chapter 13 in the first place.

Here, there was a dispute between an employer (Creditor TICO Construction) and one of its former workers, Jason Powell (Debtor). Creditor claimed that when Debtor left its employ to form his own company, he took trade secrets, broke his non-compete clause, and misappropriated proprietary information. This seemed to cause all sorts of bad blood.

TICO then sued Debtor in state court, and got a judgment against Debtor for about $250,000, which it then recorded against all of Debtor’s property in Nevada. What should have been the end was only the beginning of the litigation between the two.

Debtor filed for Chapter 13 bankruptcy relief. Creditor then filed a flurry of motions and complaints in the bankruptcy. Creditor challenged Debtor’s homestead exemption, asserted Debtor was over the unsecured debt limit and hence not eligible for Chapter 13. It also filed motions to value collateral. Creditor also filed adversary proceedings to have its debt found nondischargable under 523(a)(4) and 523(a)(6), alleging, among other things, hiding assets via transfers from Debtor to his ex-wife, who was really still his wife due to a sham divorce.

It’s safe to say that Creditor believed Debtor was a bad actor guilty of fraud and bad faith, the exact type of person it felt that was not entitled to dismissal of a Chapter 13 under some case law. And that’s exactly what Debtor tried to do at this point. Having reached his own limit of the litigation and headaches, Debtor filed a motion to dismiss. Creditor said Debtor could not dismiss a 13, since he was never eligible to be in one in the first place, and wanted the case converted to a Chapter 7 or 11. The bankruptcy court granted the motion to dismiss. Creditor appealed to the BAP.

RULING

The Bankruptcy Appellate Panel considered whether the absolute right to dismiss under 11 USC 1307(b) has an exception here, and concluded that it doesn’t.

Section 1307(b)

Section 1307(b) of the Bankruptcy Code says, “On request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable.”

That seems fairly ironclad, with words like “shall” and “at any time,” and even stating it can’t be waived. But as the BAP pointed out, this statute has somehow caused a split in the jurisdictions as to whether that right to dismiss is absolute.

Review of Case Law

The BAP then reviewed the case law. Some courts have held that it is indeed an absolute right to dismiss, regardless of findings of bad faith. In re Williams, 435 BR 552 (Bankr. Court, ND Ill, 2010). On the other hand, the Fifth Circuit has exceptions to the right to dismiss for bad faith or abuse of process. Jacobsen v. Moser (In re Jacobsen), 609 F.3d 647, 660 (5th Cir 2010).

Locally, the Ninth Circuit has been in the latter camp for a while, when the 9th Circuit Court of Appeals denied Debtor’s request to dismiss because of bad faith. In re Rossom, 545 F.3d 764 (9th Cir, 2008), The Rossom ruling of no right to dismissal for bad faith cited the US Supreme Court in Marrama v. Citizens Bank of Massachusetts, 549 US 365, (Supreme Court, 2007), which denied the right to convert a case because of Debtor’s bad faith.

In 2021, the Ninth Circuit then determined that Rossom was no longer good law, in light of the subsequent Law v Siegel ruling from the Supreme Court. In re Nichols, 10 F.4th 956 (9th Cir, 2021). No longer bound by Rossom, the Ninth Circuit in Nichols reviewed the Bankruptcy Code anew with a fresh eye. It found that “section 1307(b)’s text is unambiguous.” Id. at 963.

The 9th Circuit in Nichols then held, “We conclude that § 1307(b)’s text confers upon the debtor an absolute right to dismiss a Chapter 13 bankruptcy case, subject to the single exception noted expressly in the statute itself.” Id. at 964.

Back to 2022, Powell, TICO, and the BAP. After raising Marrama, the BAP quickly distinguished it, hinting that it doesn’t apply to the absolute 1307(b) right to dismissal by pointing to the Nichols case which overruled Rossom. “[A]s the bankruptcy court correctly held, the Ninth Circuit’s recent Nichols decision overruled Rosson and made clear that chapter 13 debtors have an absolute right to dismiss their case at any time, so long as the case had not been previously converted. Powell at 185.

Creditor TICO raised the issue that because Powell was over the debt limit, he was never a Chapter 13 debtor, and thus, Nichols and 1307 didn’t apply. The BAP wasn’t buying any of it, saying that there was nothing in 1307(b) which limits it to eligible Chapter 13 debtors, and to rule this way would be to create a new limitation not found in the statute.

In short, Nichols and 1307(b) even applies to people who had no business filing a Chapter 13. In the Ninth Circuit, the rule is clear: Marrama doesn’t apply to 1307(b), and after Law v Siegel, the statute’s plain text is unambiguous: it’s an absolute right by debtor that the court shall dismiss a case upon his request, if the case was not previously converted. Absolute really does actually mean absolute. Other circuits would do well to follow.

Bankruptcy can toll or extend the statute of limitations using Section 108(c)

Does Bankruptcy Toll the Statute of Limitations? 108c Top Points

Does Bankruptcy Toll the Statute of Limitations? 108c Top Points

Does bankruptcy’s automatic stay toll a statute of limitations for a creditor’s claim or judgment, or extend it in Calif and beyond. What to know.

When a bankruptcy is dismissed or discharged, is the statute of limitations tolled on an earlier claim by the automatic stay, and suspended? Or is the statute of limitations extended by a few weeks with just a little bit of time tacked on? The answer could make a big difference on how much time the creditor has the act on their claim, lawsuit, lien, or other collection actions.

Automatic Stay giveth, but what does it take away?

Extending time using Section 108
Live photo of someone extending time using Section 108

You probably already know there’s bankruptcy protection in 11 USC 362 called the automatic stay. In short, this means that once a bankruptcy is filed, all collections against the debtor have to stop. This is powerful and effective. In a typical case that successfully ends with discharge, the debt is no longer collectable, ever.

However, sometimes a Chapter 13 bankruptcy — sort of a years-long debt consolidation — doesn’t make it to discharge. If the case is dismissed, what happens to the statute of limitation timing on claims and judgments before the bankruptcy? Is the statute tolled (suspended), or is the timeline to collect extended?

Suspend: Tolling of the Statute of Limitations

Suspension would involve tolling the statute of limitations for the time in bankruptcy. A common example would be in California. Here, there’s a four-year statute of limitations for breach of contract. If three of those years have run, and then someone files Chapter 13 for two years before it’s dismissed, how much time remains to collect? If the statute was suspended or tolled, there would still be a year to file a law suit against debtor, post-bankruptcy.

Extend: Add some time to collect after bankruptcy.

Extension of time would be tacking on additional time to prosecute the case and file the lawsuit after the dismissal of the bankruptcy.

Let’s look at the law and see what it says for guidance.

Bankruptcy Code 11 USC 108

Section 108(c) of the Bankruptcy Code says:

…if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, or against an individual with respect to which such individual is protected under section 1201 or 1301 of this title, and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of—
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
(2) 30 days after notice of the termination or expiration of the stay under section 362, 922, 1201, or 1301 of this title, as the case may be, with respect to such claim.

What this means is that Section 108(c) kicks in regarding someone protected under Chapter 12 or Chapter 13 bankruptcies (1201 or 1301), so it wouldn’t apply in the more common Chapter 7 bankruptcy cases.

It also specifically says that the period to commence or continue an action against the debtor doesn’t expire until the later of (1) the suspension of the period; OR (2) 30 days after notice of the stay ended, which sounds like an extension.

What does this mean? Let’s go to the Bankruptcy Appellate Panel in the Ninth Circuit: “In simpler terms, unless the limitations period under applicable nonbankruptcy law would expire later, a limitations period that did not expire prepetition will expire thirty days after the expiration or termination of the automatic stay.” In re Brown, 606 BR 40, 47 (9th Cir BAP, 2019).

So, there’s both suspension and extension. Are both in play as both are in the statute, or is it just one used practically, depending on jurisdiction? As usual, we look to the courts for interpretation.

Statute of Limitations have been both extended and suspended, depending on which court interprets Section 108
Statute of Limitations have been both extended and suspended, depending on which court interprets Section 108

How the Courts have interpreted Section 108(c)

Differing opinions on suspend or extend

In the battle of suspend (toll) vs extend, the result seems to be specific to jurisdiction, facts, and the underlying nonbankruptcy law in play. The Supreme Court of the United States has weighed in: “Petitioners believe § 108(c)(1) contains a tolling provision. The lower courts have split over this issue.” Young vs US, 535 U.S. 43, 52 (Sup Ct, 2002).

Lower courts have made the same observation. “They [the parties] differ in interpretation, however, with CPI finding no separate federal basis for tolling state prescriptive periods and Rogers arguing that § 108(c) itself tolls the prescriptive period. We are not the first circuit to face this issue. Panels of both the Second and Ninth Circuits have examined the language and legislative history of this section of the Code. Unfortunately, they have created a potential split in result. Other federal courts have divided likewise.” Rogers v. Corrosion Products, Inc., 42 F. 3d 292, 296 (5th Circuit, 1995)

Statute of Limitations extended … A Little Bit

Some courts have used Section 108 to merely extend the statute of limitations. One example: “We hold that Section 108(c) of the bankruptcy Code extends a creditor’s right to bring an action through the pendency of a debtor’s bankruptcy case only for 30 days after the automatic stay expires by operation of law or is lifted by order of court.” In re Baird, 63 BR 60, 63 (WDKY, 1986).

While Section 362 doesn’t deal with time, Section 108 above has a few factors, and can extend contractual, statutory or judicial deadlines. Here’s the Second Circuit Court of Appeals: “…we observe that by its terms § 108(c) does not provide for tolling of any externally imposed time bars, such as those found in the two maritime statutes of limitations. The bankruptcy section only calls for applicable time deadlines to be extended for 30 days after notice of the termination of a bankruptcy stay, if any such deadline would have fallen on an earlier date.” Aslanidis v. US Lines, 7 F. 3d 1067, 1073 (2nd Cir, 1993).

A mere 30-day extension can be challenging for creditors, and good news for debtors, as it’s not always certain creditors will get notice of the bankruptcy dismissal in 30 days. If that’s the case, the 30 days can go quickly and then the debtor is safe from any claims brought from that creditor.

Suspended or Tolled Statute: California State Law CCP 356

Let’s start with this nugget of a quote:

“Although the automatic stay is a broad and powerful provision, it does not stay the passage of time.”

That is from Judge Sidney Weaver in the case Matter of Lauderdale Motorcar Corp., 35 BR 544, 548 (Bankr. Ct, SD FL 1983). Judge Weaver’s quote is consistent with the Second Circuit above in Aslanidis, and would seem to be very friendly to debtors. They can’t run out the clock in a bankruptcy, but a small 30-day window puts the odds in their favor.

But not so fast. Other courts (and state laws) have come to a different conclusion.

In California, the automatic stay suspends time for the SOL

Locally, in California, state law kicks in. We have CCP 356, which says: “When the commencement of an action is stayed by injunction or statutory prohibition, the time of the continuance of the injunction or prohibition is not part of the time limited for the commencement of the action.”

“A bankruptcy stay has been held to be a ‘statutory prohibition’ within the meaning of Code of Civil Procedure section 356.” Schumacher v. Worcester, 55 Cal.App.4th 376, 380 (1997) . Later, this was cited by another California court, which added: “The provisions of sections 362(a), 108(c), and Code of Civil Procedure section 356, as well as the relevant case law set forth above, enforce our conclusion that the automatic stay provisions applied here to toll the limitations periods.” Kertesz v. Ostrovsky, 8 Cal. Rptr. 3d 907, 914 (Cal Ct of Appeal, 4th Appellate Dist., 3rd Div. 2004), but note limitations in law construction that focused on the 1872 enactment date of Section 356. Inco Development, Court of Appeal of California, Fourth District, Division Two, August 4, 2005.

California law and the Discharge Injunction: also suspends time

That’s all well and good. It seems to be settled in California that because of CCP 356, the Automatic Stay of Section 362 suspends (that is tolls) the statute of limitations. But does CCP Section 356 have the same effect on tolling because of the discharge injunction of Section 524(a)(2)?

Surprisingly, the Ninth Circuit BAP says, yes, the discharge injunction also tolls and suspends time in California. To wit: “In sum, the Browns have not persuaded us that the discharge injunction is beyond the scope of C.C.P. § 356. To the contrary, we are convinced that the discharge injunction triggers the limitations period suspension provided for in the statute. Therefore, we reject the Browns’ principal argument on appeal.” Brown, 606 BR at 50.

But Beware Phillips v Gilman for Postpetition Fees and Costs in a Bankruptcy

When it comes to fees in a bankruptcy using nonbankruptcy statutes CCP 685.040 and 685.080, the Ninth Circuit BAP found that Section 108c doesn’t apply. Why? Because Section 108(c) involves seeking relief in a court other than a bankruptcy court; and that period must not have expired when the petition is filed. Both of these were missing.

The BAP of the Ninth Circuit ruled, “By their conduct, Creditors demonstrate that CCP § 685.080 did not require Creditors to act “in a court other than a bankruptcy court“; this fact alone renders § 108(c) inapplicable to their motions.” In re Gilman, 603 BR 437, 445 (9th Cir BAP, 2019). Further, “[b]ecause all of the fees were incurred postpetition, CCP § 685.080’s two-year period did not commence prepetition and, again, § 108(c) does not apply.” Id.

In short, as the Ninth Circuit Court of Appeals stated in an unpublished rejected appeal, “Section 108(c) does not apply here because Creditors filed their fee motions in the Bankruptcy Court for fees incurred after Debtor filed his bankruptcy petition.” Phillips v Gilman, unpublished, (9th Cir, 2020). The lesson? It’s in footnote 9 of the main BAP case: ” the bankruptcy court did not prohibit Creditors from filing CCP § 685.040 motions or memoranda at two-year intervals.”

The Ninth Circuit Extends for Judgments

Let’s go outside of California state law, but stay in the Ninth Circuit. What do we find there?

In 1989, the Ninth Circuit weighed in on the issue when it ruled that Section 108(c) extends the limitations period so long as the creditor is barred by the automatic stay from enforcing its judgment against the property of the estate. Hunters Run, 875 F.2d 1425 (9th Circuit, 1989).

That settles it, then, right? Not so fast. The 5th Circuit Court of Appeals found 9th Circuit’s ruling “opaque” when it ruled: “Again, the general question was whether § 108(c) applied to the time limits of enforcement actions of liens. The court held that it did and that the time period was “tolled.” The court did not decide whether the “tolling” meant that the time period ceased to run, or simply that a thirty-day grace period existed under the statute if the time period had run.” Rogers, 42 F. 3d at 296-297.

The Hunters Run rule was discussed further in In re Spirtos, 221 F. 3d 1079 (9th Circuit, 2000), where the Ninth Circuit (not BAP) distinguished collecting on a judgment versus merely renewing a judgment. There, the Circuit Court recited what Hunters Run stands for, and then itself ruled the proposition that section 108(c) extends the limitations period so long as the creditor is barred by the automatic stay from enforcing its judgment against the property of the estate.

More recently, in evaluating an ORAP lien, the Ninth Circuit held “that the period in which a creditor may execute on a lien constitutes the continuation of the original action that resulted in the judgment and is thus tolled during the automatic stay.” In re Swintek, 906 F. 3d 1100, 1102 (9th Circuit, 2018).

The IRS, taxes, and 108(c)

Generally, taxes, tolling, and the bankruptcy automatic stay

Taxes are a very tricky issue in bankruptcy, much of it involving timing. As a rule, taxes are not dischargable in bankruptcy. The exception is that they can be eliminated if enough time has passed for various benchmarks.

Section 6503(b) of the Internal Revenue Code states:

The period of limitations on collection after assessment prescribed in section 6502 shall be suspended for the period the assets of the taxpayer are in the control or custody of the court in any proceeding before any court of the United States . . . and for six months thereafter.

How does the IRC’s 6503 interplay with the Bankruptcy Code’s 108? Or put differently, what if someone is in a Chapter 13 during the three years the IRS has to collect taxes in their priority status of 11 USC 507(a)(8)?

The Ninth Circuit BAP, citing Baird above, and reviewing Congress’ legislative intent, found that, “…it is clear that Congress, by enacting Section 108(c), intended to activate Section 6503(b) and thereby suspend the running of the statute of limitations for tax collection during a taxpayer’s bankruptcy proceedings.” In re Brickley, 70 BR 113, 115, (9th Cir BAP, 1986). Section 6503, then, takes over for Section 108, and the result for the tax clock is that it’s suspended. (But see In re Gurney, 192 BR 529, (9th Cir BAP, 1996), allowing the court’s Section 105 powers for equitable tolling balanced against the policy to prevent tax evasion schemes, limited in In re Gardenhire, 209 F. 3d 1145, 9th Circuit, 2000).

The Ninth Circuit Court of Appeals found the BAP’s logic in Brickley persuasive, and followed it in In re West, 5 F. 3d 423 (9th Circuit, 1993). There, the 9th Circuit reviewed the 240-day rule of Section 507’s interaction with Section 108. Considering using bankruptcy for tax evasion, the Ninth Circuit concluded, “The debtors’ joint Chapter 13 case suspended the running of § 507(a)(7)(A)(ii)’s 240-day priority period from the date of the bankruptcy petition until six months after the case was dismissed. ” West at 427.

Equitable Tolling and the Statute of Limitations in Bankruptcy

Sometimes, courts find that it’s just fair to prevent someone from using bankruptcy in a tax evasion scheme. In those situations, equitable tolling is used to provide the taxing authority more time to collect the taxes.

In the Young case discussed above, a person filed a Chapter 13 bankruptcy during the three-year lookback period, and then a Chapter 7 in an effort to run out the clock. The Supreme Court found equitable tolling, finding the just result was stopping the clock (ie: suspending) and the statute of limitations during the bankruptcy cases.

In the Ninth Circuit, that was not the result when Brenda Jones filed a Chapter 13 bankruptcy, and then filed her California state tax return owing money. The Franchise Tax Board (FTB) didn’t protect its claim in the 13, and then years later, Jones dismissed her case and then filed a Chapter 7. The FTB wondered if it could maintain a postconfirmation tax claim if the prepetition property of the estate revested in the debtor at confirmation. Here, the Ninth Circuit Bankruptcy Appellate Panel distinguished from Young and found no equitable tolling because the FTB didn’t seek relief from the automatic stay or file a motion to dismiss in the 13 for its priority taxes. In re Jones, 420 BR 506 (9th Cir BAP, 2009).

Summing up

The bottom line is, well, there is no bottom line. Cases are all over the map, depending on the state, circuit, and underlying nonbankruptcy law. It would seem pretty straightforward that once a bankruptcy is dismissed, you just wait thirty days and hope you don’t get sued. However, there are many courts, states, and situations where the statute of limitations is tolled, that is stopped, while the bankruptcy and automatic stay is active.

And so the short answer, like most things in law, is, “it depends.”

median income limits

2023 Median Income Limits to Nail Bankruptcy Means Test in Calif

Median Income Limits to Nail the Bankruptcy Means Test: New for 2023

The government just updated the numbers for 2023 median income limits. Using median household income, it again got easier to qualify for bankruptcy Chapter 7, because of another means test adjustment. And while bankruptcy may seem to be “just forms,” make sure you check out my list of 12 crucial tips to do or avoid before filing bankruptcy.

The means test for bankruptcy decides who qualifies for Chapter 7 bankruptcy eligibility. The first step of this process is comparing your median household income against the California median income limits set by the Department Of Justice guidelines to see if you earn less than bankruptcy median income limits.

Again, this comparison against the median income is merely the first step, and does not absolutely determine your eligibility for Chapter 7 or not.

Nov 2022 Update: The numbers for the means test adjusted November 1, 2022, and will be used for the first part of 2023.

Because of the above statement, these will be the first 2023 median income limits.

The means test limits adjusts over time. So, someone may not qualify according to the bankruptcy means test in one month but after the changes they do, or vice-verse. The last updates were in November 2022 . Below are the November 2022 bankruptcy median income figures to determine who can file Chapter 7 bankruptcy.

Means Test: 2023 Median Income Adjustments

2021 median income limits
2023 median income numbers are much higher than in years past

Every now and then, the government updates the bankruptcy median income limits. They last did it in Nov 2022. Good news: the California 2023 median income numbers are now even higher, increasing household income for bankruptcy means test qualifying. This means that more people could qualify for Chapter 7 bankruptcy using the California median income numbers below.

2023 Median Income for California Households

Because the California median income changes maybe once or twice a year, these recent changes last 2022 will be the first numbers used for 2023 median income. You’ll see below there’s talk about household size. Notice also that larger families also get a break, as the amount for each additional member after 4 increases another $9,900. This is helpful for households of five people or more.

What is Median Household Income: Roommates and Spouses

When reviewing median household income, we start splitting hairs, since not every home is a traditional household. So, things start getting kind of cloudy on what is or isn’t a household. It isn’t always clear who counts in a household.

Note that if you’re married in California, there’s a community property presumption that your spouse’s income is yours also. So add that, and them, to your household figures. Yes, you can file bankruptcy without your spouse. However, their income, assets, debts, and everything else of theirs still comes into your bankruptcy. Why? California is a community property state. Read more for a deeper dive in my article about spouses and filing bankruptcy.

There may be a difference if you have a roommate who pays rent. What if you’re married? Separated? Or have kids but they’re adults. Do you live with your significant other, who has their own finances? Would the answer be different if you had kids together, but weren’t married? Maybe they’d all be considered by the government to be in your household. Or, maybe they’re not.

You can see this is isn’t as simple as it may at first seem. Contact me and set up a Zoom to talk about it.

But below are the California median income limits for the various household sizes.

California household size and California median income for Bankruptcy
  • 1-person household: $69,660
  • 2-person household: $86,271
  • 3-person household: $97,021
  • 4-person household: $113,615
  • Each additional person: $9,900

These are the California median income numbers effective November 1, 2022. If it’s 2023 or you’re looking for the median household income for a different state, please review the DOJ link above.

Read Our Means Test Guide.

California Means Test Calculator for Chapter 7

Many of you have asked about a Means Test Calculator for Chapter 7. So, I put together the following Chapter 7 means test calculator. For other states, there many be others elsewhere on the internet, this won’t apply. This means test calculator for Chapter 7 bankruptcy is just for California.

Also, this is not intended to give advice or definitively say you qualify for Chapter 7 or not. The actual means test is many pages long, and it’s possible to qualify if your income is over the median. Similarly, it’s also possible to be ineligible for Chapter 7 even though your household income is under the median income. Reducing it to one box is like a cheap parlor game, and you should kind of think of this that way.

But notice how, after you input your income, how changing the household size affects the bottom line. As bankruptcy attorneys, this is something we have to be very mindful about and argue for our clients: the appropriate household size based on the unique circumstances of our clients.

With that being said, here’s my very crude 2022-2023 Means Test Calculator for Chapter 7 for California, which you should take with a massive grain of salt:

Wait! Can you file bankruptcy if your household income is over the median?

If you’re over the bankruptcy median, there’s still hope

Yes. The means test and 2023 median income isn’t the “end all be all.” The above/below median part is just a starting point. A person can still file Chapter 7 bankruptcy, in some cases, even if they earn more than the median income. The bankruptcy means test would just need to be filled out completely. It’s still possible to qualify.

Over the years, this Los Angeles bankruptcy attorney has helped people who earn over the California median income limits still qualify for Chapter 7. In one case, we even helped a family whose annual income was almost double the median household income. They were earning around $150,000 a year, and we helped them get a Chapter 7 discharge (your mileage may vary). However, even if someone isn’t eligible, debt consolidation is still a solution in Chapter 13 bankruptcy.

Being Under the Bankruptcy Median Income Doesn’t Guarantee Success

On the other hand, just because someone is earning less than the California median income, it’s possible that they’re not eligible for Chapter 7 bankruptcy. Bankruptcy is all about whether someone can afford to repay their debt or not, and the means test is just one factor.

Note: the median income numbers are not to be confused with the Los Angeles County median home price figures, and each has a different place in evaluating Chapter 7.

Finally, as the economy is always changing, so does California median household income. We don’t know the next time changes to the median income limits will happen again. So, be sure to check before relying on these California median income limits in the future.

Contact Us and Let’s Find out If you Qualify



    It's possible to change a Chapter 13 plan payment

    Changing the Plan Payment in Chapter 13 Bankruptcy: What to Know

    Changing the Plan Payment in Chapter 13 Bankruptcy by Motion to Modify: What to Know

    A Motion to Modify can drop the Chapter 13 plan payment

    You can change your payment amount in Chapter 13 bankruptcy, and this is done by a Motion to Modify. It can lower your payment. But beware, someone can also raise it. Here is everything you need to know.

    So I can change my monthly payment for a Chapter 13?

    Yes. Of course, there has to be a reason (and I want more money for movies and travel isn’t good enough). Let’s look and see what the law says.

    Bankruptcy Code for Modifications of Plan: 11 USC 1329

    Section 1329 of the Bankruptcy Code is the statute or law that discusses when you can modify or change your Chapter 13 plan. Section 1329(a) is the common one that comes up. It says:

    At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to increase or reduce the amount of payments on claims of a particular class provided for by the plan modification

    Let’s unpack this a little bit.

    At any time after confirmation

    This is saying that the plan can be modified after the case is confirmed. Confirmation is the stage of a Chapter 13 case where the proposal that we put together — the Chapter 13 Plan — is accepted and approved by the court. So, Section 1329 kicks in once the case is confirmed. Prior to that, it’s just a new proposal, which is what we can an amended plan. Amended, modified… they mean the same thing, but the rules and process can vary depending on the stage and if the plan has been confirmed.

    Before the completion of payments

    It’s very important that you can’t modify a Chapter 13 plan once all the payments have been made. Now, you might ask, “why would I want to modify the plan if I’m basically finished?” The answer is sometimes there are surprise claims or other things that spring up at the last minute. The trustee then demands a balloon payment to finish the case, which more often than not the debtor doesn’t have. Normally, you’d want to modify the plan, but if the last payment has been made, it’s too late.

    Plan can be modified upon request of debtor, trustee, or claims

    Quite often, one of my clients will ask to have their plan modified if their income has dropped during the plan term. Usually, Section 1329 and a Motion to Modify (or MOMOD) is the solution. We can typically lower the monthly plan payment to something that is affordable after the income change. (however, there sometimes are other factors in Chapter 13 like liquidation value, etc that require the payment to stay higher; your mileage may vary). So, debtor would want to file a MoMod, or a Motion To Convert to Chapter 7, as a solution to change in circumstances.

    While Section 1329 is helpful so that the debtor can try to lower the payment, this can go both ways. Trustee or a creditor can also file a motion to modify. Why would she want to do that you ask? Stay tuned:

    Increase or reduce the amount of payments

    There it is: the trustee (or a claim/creditor) may want to file a Motion to Modify to increase the payment. Why? Because there is more income available due to a new job or a pay raise. This typically would happen after the trustee sees the annual tax returns or pay stubs during the Chapter 13, and discovers the debtor can afford to pay more.

    The Standard: Section 1325, Good Faith, Substantial, Unanticipated

    Section 1329 Points to Section 1325: Good Faith

    What is the standard for the court to allow a modification? It’s spelled out in Section 1329(b)(1), which says, “Sections 1322(a), 1322(b), and 1323(c) of this title and the requirements of section 1325(a) of this title apply to any modification under subsection (a) of this section.”

    Section 1325(a)(3) says in pertinent part, “the plan has been proposed in good faith.”

    Substantial and Unanticipated?

    The Fourth Circuit Court of Appeals has held that “[a] debtor’s proposal of an early payoff [of a bankruptcy plan] through the refinancing of a mortgage simply does not alter the financial condition of the debtor and, therefore, cannot provide a basis for the modification of a confirmed plan.” In re Murphy, 474 F. 3d 143, 150-151 (4th Cir, 2007). It then went on to rule, “a debtor must experience a substantial and unanticipated change in his post-confirmation financial condition before his confirmed plan can be modified pursuant to §§ 1329(a)(1) or (a)(2).” Id. at 151.

    The Ninth Circuit instead interprets Good Faith

    9th Circuit BAP: substantial and unanticipated isn’t in the Bankruptcy Code

    However, closer to home here in the Ninth Circuit, the standard is different from that in the Fourth Circuit. “Notably missing from § 1329 is any express requirement that a substantial and unanticipated change in the debtor’s financial circumstances is a threshold requirement to overcome the res judicata effect of a confirmed plan under § 1327(a).” In re Mattson, 468 B.R. 361, 367-368 (9th Cir BAP, 2012). “The First, Fifth and Seventh Circuits have rejected this approach and do not impose on parties seeking to modify a confirmed plan the threshold requirement of the substantial unanticipated change test.” Id. at 368.

    Stick to Good Faith

    The Ninth Circuit Court of Appeals has ruled on this, providing a ‘good faith’ standard: “whether the debtor has misrepresented facts in his plan, unfairly manipulated the Bankruptcy Code, or otherwise proposed his Chapter 13 plan in an inequitable manner.” In re Goeb, 675 F. 2d 1386, 1390 (9th Cir, 1982). At footnote 9, the 9th Circuit in Goeb stated, “We emphasize that the scope of the good-faith inquiry should be quite broad.”

    And here’s what Good Faith is

    Now, back to Mattson, interpreting what good faith is. The 9th Circuit Bankruptcy Appellate Panel continued: [N]o single factor is determinative of the lack of good faith….. [D]eterminations of good faith are made on a case-by-case basis after considering the totality of the circumstances.” Id. at 371-372. “We continue to accept that a good faith analysis under § 1325(a)(3), although not an exact science, adequately guides the exercise of the court’s discretion for deciding plan modification issues.” Id. at 371. Summing up, it wrote: “At bottom, determinations of good faith are made on a case-by-case basis, after considering the totality of the circumstances.” Id. at 372.

    So, in the Ninth Circuit, the guidance is given that to modify a Chapter 13 plan payment, bankruptcy courts look at good faith, using their discretion, while reviewing the totality of the circumstances.

    lien in bankruptcy cars

    Liens in Bankruptcy: The Ultimate Guide, Explained

    Liens in Bankruptcy: The Ultimate Guide, Explained

    Liens in bankruptcy typically survive and don’t get affected by the discharge. However, there are exceptions where the lien can be reduced or even eliminated. I try to break these down in simple terms that are easy to grasp. But don’t be fooled: bankruptcy is more complicated than you think. Get a consultation with an attorney, and make sure you check out my list of 12 crucial tips to do or avoid before filing bankruptcy.

    What is a Lien in Bankruptcy?

    A lien is a security interest of a debt that encumbers a thing owned by the borrower until the debt is paid. One common example is a car and the car loan. The borrower who “owns” a car can’t just sell the car outright. He has to pay the debt secured by the lien against the car first. Then, once the debt is paid, the lien is satisfied and removed.

    Section 101(37) of the Bankruptcy Code defines “lien” as:

    charge against or interest in property to secure payment of a debt or performance of an obligation.

    How does bankruptcy affect a lien? The General Rule

    The general rule for liens in bankruptcy (and there are exceptions) is that bankruptcy doesn’t affect a lien at all. If a debt is secured by a lien and collateral, if you wish to keep the asset, then that debt will survive the bankruptcy. You don’t get a free house or car in bankruptcy. Here, let me put that in a fancy quote because it is so important:

    You don’t get a free house or car in bankruptcy.

    – Attorney Hale Andrew Antico

    There is a reason this is emphasized so strongly. For some reason — be it wishful thinking or confusion because the lender stopped sending statements or something else — people sometimes stop paying for a house or car. This is a mistake that can result in foreclosure or repo.

    house lien in bankruptcy
    Not really representative of a lien in bankruptcy, but it shows money and houses so pretend there’s a chain encumbering them.

    If you wish to keep the thing with a lien in bankruptcy (e.g.: your house), then you must continue to making regular payments on the loan or loans that goes with it. With that general principle out of the way, there are some specific exceptions or applications.

    Chapter 7 bankruptcy and Liens

    How does bankruptcy affect a lien in Chapter 7?

    Chapter 7 bankruptcy is the simpler bankruptcy. You don’t normally pay unsecured debts back here. But how does bankruptcy affect a lien in a Chapter 7? The short answer: liens don’t go anywhere. If you started a Chapter 7 with a debt secured by a lien, you will most likely end the Chapter 7 with a lien. Nothing changes. Let’s look at a few different things that come up.

    Vehicles in Chapter 7: You don’t get a free car

    Repeat after me: In Chapter 7 bankruptcy, you don’t get a free car. If you are financing a vehicle, if you want to keep the vehicle, you must keep paying the loan. No matter what happens, you must keep current and paying for the car (or truck or RV or quad or other secured vehicle) if you want to keep it.

    If your bank turns off your online access, you must keep current and paying for the car if you want to keep it. If your bank stops sending you statements or coupons, you must keep current and paying for the car if you want to keep it. If aliens abduct your Aunt Nana, you must keep current and paying for the car if you want to keep it.

    You must be wondering why I’m spending three paragraphs repeating something that seems quite basic. You know, the concept that you must keep current and paying for a vehicle if you want to keep it. This is because no matter how obvious, no matter how many times this is repeated, people still somehow stop paying for their vehicle because they read on some message board on Google Esq. that they get a free car in bankruptcy.

    But that’s false. You know why? Because there’s a lien on the car. And it remains. Why?

    Because you don’t get a free car in Chapter 7 bankruptcy.

    lien in bankruptcy car
    Lien in bankruptcy doesn’t go anywhere with regard to a car in Chapter 7 because you don’t get a free car in bankruptcy.

    Reaffirmation Agreements in Chapter 7

    Definition of Reaffirmation Agreement

    A reaffirmation agreement is an agreement where you … reaffirm a debt. This has the legal effect of you promising to owe a debt after the bankruptcy, no matter what. I think we can all agree that vowing to be liable on a debt regardless of what happens after a bankruptcy is the opposite of what bankruptcy is supposed to be.

    Why on earth would someone say, for example, yes, please, make me owe my mortgage balance even if I ever lose my house to foreclosure? You wouldn’t. Because that’s crazy. That’s what a reaffirmation agreement is: a contract where you make yourself owe a debt after the bankruptcy, regardless of what surprises the future throws at you.

    That is crazy. Why would I ever sign a reaffirmation agreement?

    Good question. You would never voluntarily promise to undo the bankruptcy for a debt on which you are trying to avoid personal liability. Again, it defeats the purpose of bankruptcy to say yes, I’d like to owe this debt after bankruptcy.

    Bankruptcy is intended to get you out of debt. Reaffirmation agreements are intended to get you back into debt.

    But you just told me I’ll owe the car debt after bankruptcy no matter what.

    Not quite. The example above is just talking about payments for a car that you intend to keep. If you want to keep the car, pay for it on time. What we’re talking about now is the possibility you lose the car or house or RV after the bankruptcy.

    Let’s say a year after the bankruptcy is done, an asteroid hits your employer and you lose your job and the can’t pay for the house or car. They repo or foreclose and you lose the thing, right? Right.

    But if you signed a reaffirmation agreement, you not only lost the house or car, but you also owe for the contract for the house or car you no longer have. Why? Because you signed a reaffirmation agreement. Can we agree that’s a bad outcome?

    Holy cow, that’s terrible. Why would I ever sign a reaffirmation agreement?

    You wouldn’t voluntarily sign a reaffirmation agreement unless you had to. And for vehicles, if you want to keep the collateral, you need to stay current on payments and you need to sign a reaffirmation agreement if they send one to you. For mortgages, you don’t generally need to or want to sign one. Any lender that tells you you needed one during your bankruptcy is mistaken, lying, or evil. Probably just mistaken.

    Note: the law is changing in California in 2023 to bring back bankruptcy ride-through. SB1099 will make it no longer a default on a car loan if you don’t sign a reaffirmation agreement for a vehicle.

    522f Lien Avoidance in Chapter 7: Judgment Liens

    Recap of the rule: liens in Chapter 7

    The rule for liens and lien avoidance in Chapter 7 bankruptcy is that the lien doesn’t go anywhere and you don’t get a free house or car in Chapter 7. If you started Chapter 7 with a lien on your car or a second mortgage on your house, you will likely end the bankruptcy with one, as there usually is no lien avoidance in Chapter 7. There can be one exception to this, and you have to qualify for it, contract for it, and yes, usually pay for it: judgment liens.

    Possible Exception: What is a Judgement Lien

    A judgment lien is when someone sues you, and as a result of the lawsuit, the judge rules against you. As a result, there is a now judgment against you. One way to collect on a judgment is a judgment lien against real estate or property you own or have an interest in. In California, the judgment lien cannot foreclose on you and take your house. However, it can sit there and grow with interest until you sell, refinance, transfer, or otherwise try to change the title. Then, it needs to get paid in full.

    Oh no. What is a Judgment Lien Avoidance in Bankruptcy?

    A judgment lien avoidance is where, in some cases, you can remove, or avoid, the judgment lien in bankruptcy… even Chapter 7 bankruptcy. Yes, it’s possible in Chapter 7 bankruptcy to avoid a judgment lien. However, it is not possible in every case, and doesn’t happen automatically. It’s extra work, and unless you contract for (and pay extra for) this extra work, the judgment lien avoidance won’t happen. Plus, the calculations around your home equity and lien amounts have to be right to qualify for it.

    What are the factors to qualify for Judgment Lien Avoidance?

    To qualify for lien avoidance in bankruptcy, we turn to Section 522(f) of the Bankruptcy Code, which says, in part: “the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled.”

    So, for judgment lien avoidance, you need to determine if the lien impairs an exemption. At its core, this is a simple math problem. Here, in the Central District of California, the form we use spells it out pretty clearly, as you can see below.

    522f judgment lien avoidance calculations
    522f judgment lien avoidance calculations from CDCA form F 4003-2.1.Avoid.Lien.RP.Motion

    The factors are pretty self-explanatory:

    • Value of Collateral: that’s what the house is worth
    • First lien: this is usually the primary deed of trust, or first mortgage
    • Amount of Debtor’s exemption: the amount of the exemption Debtor is entitled to

    Lien Avoidance Formula: Take the value of the collateral, then subtract the debtor’s liens which cannot be avoided, and then subtract the exemption amount. That’s the amount that remains to pay judgment liens.

    Still, this can be confusing. Read on!

    522(F) Judgment Lien Avoidance Calculator

    Below is a judgment lien avoidance calculator to help with the math of determining whether a judgment lien is impairing an exemption per 11 USC 522(f). You can only avoid the lien up to the amount it is impairing the exemption. If there is only partial impairment, there can only be partial judgment lien avoidance.

    Timing of amounts used for lien exemption

    If you learned of a judgment lien now but had an old bankruptcy where you didn’t avoid it, you may still be able to avoid the old judgment lien using the old bankruptcy. But exemptions change over time. Which home value and exemptions amount do you use?

    Chapter 13 Bankruptcy and Liens

    Section 506: Lienstripping a junior mortgage, mortgage cramdown, or avoiding a second mortgage lien

    What Does the lienstripping law say?

    There are really a few sections to focus on. First, section 506(d) of the Bankruptcy Code states, generally:

    To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void

    Making a lien void is a very good thing, and in Chapter 13 bankruptcy this can sometimes be done. The problem is it can’t be done all the time; the circumstances — and the math — have to be just right. Sometimes Sections 506(a) and 1322(b)(2) come into play in helping define what is secured.

    The 9th Circuit BAP clarified when this can be done in In re Lam, 211 BR 36 (9th Cir BAP, 1997). It was in this major ruling when the Bankruptcy Appellate Panel ruled, “The Nobelman decision holding that section 1322(b)(2) bars a chapter 13 plan from modifying the rights of holders of claims, secured only by the debtor’s principal residence, does not apply to holders of totally unsecured claims.” Id. at 41.

    liens in bankruptcy house
    Liens in bankruptcy regarding a house, this time with a chain encumbering it in rich symbolism.

    So, the key language in Lam is “totally unsecured.” Unlike avoiding a lien under 522(f) which can allow partial removal of a judgment lien, avoiding a consensual lien like a deed of trust or mortgage cannot be partially secured. “…a one dollar difference in property value could have a profound effect on a secured creditor’s rights.” Lam at 41. So the evidence for property value is key, and this can be where all the fight is.

    Lam Lienstrip Examples

    Let’s say Debtor has a home valued at $200,000 with a first mortgage of $225,000 and a second mortgage with a balance of $50,000. Because the second isn’t “touching” the secured house, it is totally unsecured and can be avoided with a lien-strip in a Chapter 13 bankruptcy. However, if that same property were valued at $230,000, then there’s about $5,000 of secured status for the junior mortgage. That’s enough to make it a secured claim, and then, because it’s not wholly unsecured, it cannot be avoided or lienstripped.

    I made a handy calculator where you can test out the above lien stripping examples yourself, and of course, your own numbers to see if it’s totally unsecured and qualifies in the Ninth Circuit for lien avoidance under Lam.

    If you are in the Los Angeles, Ventura, or Orange County, contact me and let’s go over your options.

    Section 522(f) and Judgment Liens in Chapter 13 bankruptcy

    Judgment liens, where for example, a credit card won in court against you and then liened your home, can be avoided in Chapter 13 if they impair an exemption. While there can be a huge benefit to removing a judgment lien in Chapter 13, it also wouldn’t be necessary if it’s a 100% plan. In other words, if you’re paying all your unsecured debt back, turning a secured debt to an unsecured one wouldn’t provide a whole lot of benefit but would increase legal fees. For a discussion – and a judgment lien calculator — see above in the Chapter 7 judgment lien section.

    What is Cramdown in Bankruptcy (Chapter 13)?

    Chapter 13 bankruptcy cramdown is where we can reduce the secured debt of a car to the fair market value of the vehicle. In other words, in Chapter 13, we can “cram down” the loan balance to what the car is worth if the loan was incurred over 910 days ago. The remaining debt gets paid through the Chapter 13 plan at the same percentage as the unsecured debt, potentially saving thousands of dollars on a vehicle loan.

    A bankruptcy cram down example would be if a vehicle loan was $30,000, and the car was only worth $18,000. In Chapter 13, it’s possible to only pay $18,000 for the car loan, and treat the rest of the car debt like credit card debt. Again, this wouldn’t make a lot of sense if it’s a 100% plan or there is some doubt you’ll be able to finish the bankruptcy with the car “in the bankruptcy” because if the case is dismissed, you’re now late on the loan which was being partially paid through the case, which is now ended. You’ll need to ensure you can get to the finish line if you take this route. However, the benefit can be valuable.

    Penrod and Negative Equity

    Is The Negative Equity PMSI?

    Penrod is not just a funny name, but a Ninth Circuit case. The Penrod case addresses trade-ins which had the old loan rolled into the new one, where the old loan is now called negative equity. We just learned that we can cram down a vehicle loan if the balance is more than the vehicle’s value if the debt was incurred over 910 days prior to filing. There is a way to remove the traded-in loan from the current loan, even if this happened in the 910 days before filing.

    Marlene Penrod traded in an Explorer and bought (and financed) a 2005 Ford Taurus. She rolled about $7,000 of her old Explorer loan into the new Taurus financing. Less than 910 days later, she filed Chapter 13 bankruptcy. In the case, she bifurcate, or split, the Taurus loan into two, and said she’d only pay the new Focus price in full as Purchase Money Security Interest (PMSI). The negative equity from the Explorer wasn’t purchase money, and therefore wouldn’t be secured.

    The new finance company objected, and the Ninth Circuit Court of Appeals agreed with Marlene Penrod when it wrote, “In sum, we find that a creditor does not have a purchase money security interest in the “negative equity” of a vehicle traded in during a new vehicle purchase.” In re Penrod, 611 F. 3d 1158 (9th Cir, 2010).

    Penrod and Gap Insurance and Extended Warranties

    Not only can negative equity can be removed from a vehicle loan in a Chapter 13 in the Ninth Circuit, other bankruptcy courts in the circuit have broadened this to other areas. For example, in Washington state, a bankruptcy court has held that Penrod also applies to removing gap insurance and an extended warranty. This is because, like negative equity, they are not part of the purchase money security interest. In re Jones, 583 BR 749 (WDWA, 2018).

    In Jones, the court ruled:

    Accordingly, this Court finds the Option Contracts are not part of the “price” of the Vehicle secured by the PMSI. Like negative equity, the Option Contracts are not sufficiently related to the purchase of the Vehicle. Unlike other expenses listed in Official Comment 3, neither the purchase of optional gap insurance or maintenance contracts are akin to sales tax and license fees, which are not optional but are required in order to obtain the vehicle.

    Jones at 755.

    It went on to write, “The Court concludes that Kitsap Credit Union’s purchase money security interest in the Vehicle does not secure sums advanced to pay for optional gap insurance and vehicle maintenance contracts.” Id. at 759.

    Tax liens in Bankruptcy

    Tax liens in bankruptcy generally don’t go anywhere. In Chapter 7, because they didn’t get paid, they survive the bankruptcy case. A tax lien in bankruptcy (Chapter 13) will have to be paid as a secured debt to avoid it and remove it. This can create feasibility problems in your Chapter 13 bankruptcy case, depending on the size of tax lien and secured debt. As always, discuss with a bankruptcy lawyer.

    In sum

    Liens in bankruptcy are generally not removed, and you don’t get a free car or house. Sometimes liens can be reduced, stripped, or avoided, if the math works out right in various situations. There is a lot more flexibility in Chapter 13 bankruptcy to reduce or even eliminate liens. Arrange a consultation with an experienced bankruptcy attorney in your area to learn your particular options. Thanks for reading.

    student loan forbearance ends 2022

    Student Loan Payment Pause Extended: Deferment Thru June 2023

    Student Loan Payment Pause & Deferment Extended thru June 2023

    Student Loan forbearance and payment pause extended to July 2023; there are still options

    November 2022 update: The student loan payment pause has been extended again, for the sixth time, to June 30, 2023. The pause may end and payments resume if lawsuits are resolved first. If the June 30 2023 student loan pause lapses without litigation being resolved, payments will resume 60 days after that. Also big news in Nov 2022: the Biden Justice Department (DOJ) has announced new guidance which will make it easier to discharge student loan debt in bankruptcy.

    April 2022 update: The student loan payment pause was set to end May 1, 2022, but the Biden administration extended it through August 31, 2022. It was previously set to end on May 1, 2022. Since March 2020, millions of student loans were given forbearance and deferment with no payments due, interest stopped accruing, and there have been no collections against those in default due to the student loan payment pause.

    Now, all that student loan relief changes back to normal on Sept 1, 2022.

    Will student loans be deferred again in 2022?

    As we get closer to election season, it looks like there may be more student loan deferments. Back in August 2021, the Department of Education called the student loan pause a “final extension.” In December 2021, the White House confirmed that the student loan payment pause will not be extended. Then earlier this year and again, today, that’s exactly what the Biden administration did.

    What action items should I do?

    Update your contact information with your student loan servicer. While you’re there, let them know that you want to resume automatic payments if that’s your goal.

    Alternatives to paying unaffordable student loans

    Apply for student loan forbearance

    If you can’t afford to pay your student loans, you can still apply for student loan deferment or forbearance. While it’s been automatic the past two years, student loan forbearance or deferment is still an option in 2022.

    Income-driven student loan repayment plans

    Also, there are income-driven repayment plans such as IBR, ICR, PAYE, or REPAYE. These programs set your student loan payment based on what you can afford, which state you reside in, and family size. These income-based repayment plans are not guaranteed acceptance, and not every loan type is eligible for each program.

    Will bankruptcy help with my student loans?

    You probably heard that, as a rule, you cannot discharge student loan debt in bankruptcy. However, there are three things to consider with student loans and bankruptcy.

    First, in extremely rare situations, you can discharge student loan debt in bankruptcy. You may have heard that the standard is undue hardship, and that’s exactly what you’ve got. However, courts have ruled that everyone filing bankruptcy has a hardship, and to show it’s undue is difficult, challenging, and very unlikely in most cases.

    Second, filing Chapter 13 bankruptcy gets you a five-year deferment on repaying your student loans directly. You don’t generally need to apply or ask for the forbearance; it’s automatic. The student loan debt shares in the debt consolidation plan payments.

    Third, there’s a Fresh Start bill in Congress which may change student loan forgiveness and allow some student loans to be discharged in bankruptcy. As 2022 begins, this S2598 bill is still in the Senate and hasn’t moved since August.

    Contact us for a consultation

    If you’re in the Los Angeles County area, contact us and let’s arrange for a no-obligation Zoom consultation to see if bankruptcy would help your student loan situation.


      means test for chapter 7 bankruptcy

      Bankruptcy Means Test: a calculator, and a trick to pass (2023)

      Bankruptcy Means Test for Chapter 7 in California, and Everywhere Else

      Bankruptcy means test for Chapter 7 was created by Congress to decide if you qualify for liquidation or straight bankruptcy. Here is what it is, some answers to common bankruptcy means test questions, and a weird tip on passing the bankruptcy means test and its median income limits (ok, it’s not weird, but I think you’ll find it helpful).

      Historically, there was no bankruptcy income limit

      Before 2005, any income earner could, in theory, file Chapter 7 bankruptcy. There was a time in those days where a single person filing bankruptcy could earn $8,000 a month after taxes and still get a discharge. The credit card companies lobbied Congress to change the law and make it harder to qualify. In response, Congress passed a bankruptcy reform called BAPCPA in 2005. One of the new provisions was to add a means test so that the more someone earned, the harder it became to qualify for Chapter 7.

      What is the Bankruptcy Means Test

      The bankruptcy means test is a long form that asks how much money someone has earned recently. It starts by determining a) what your “current monthly income” is. Then, it compares that to b) a median income limit for their state, for a similar-sized household. If your income is less than the magic number, you pass the means test for Chapter 7. Consequently, you can file bankruptcy that way.

      Figuring Your Current Monthly Income

      Once you’ve figured out which income limit number is the standard for your state, you now need to compare against it your current monthly income. And like most things in bankruptcy, this is not as straightforward as it seems.

      What is Current Monthly Income on the Bankruptcy Means Test?

      How do you calculate current monthly income? Let’s start by saying what it’s not.

      Current Monthly Income is Not

      Current monthly income is not your current income, as reflected from your most recent paystub. Now, that might not make much sense, but this is law, and bankruptcy law, to boot.

      It’s also not what you put on your most recent tax return. While that is helpful information, and your bankruptcy attorney will want that for different reasons, the tax return actually has no place on the means test.

      Current Monthly Income is

      Put simply, the current monthly income is the average of all the income you’ve earned the past six months. Note the word “all” before income. It’s not just the gross income from your paychecks.

      It also counts most government benefits, bonuses you got from work, commissions, overtime, tips, and all those other deposits from Zelle and Paypal on your bank statements (speaking of which, see my list of 12 crucial tips to do before filing bankruptcy).

      But I don’t get to keep my gross income before taxes

      Notice that above I used the word “gross income” from your paycheck. You might think it’s not fair that they’re counting all the money you earned before Uncle Sam takes his cut with taxes and other payroll deductions.

      But that is the way Congress wrote the law, and the form. “Your gross wages” are literally the first words used when it’s time to input numbers on the bankruptcy means test. Don’t worry: there’s a place where we get to subtract taxes later if you earn “too much.”

      Check out our ultimate
      Chapter 7 bankruptcy guide

      Your State’s Median Income

      bankruptcy means test for chapter 7
      A bankruptcy attorney can skillfully complete the bankruptcy means test for chapter 7.

      I use the bankruptcy means test for California, because that’s where I am. If you’re someone else, you’ll use a bankruptcy means test calculator or complete it for your state. (and see below for a link to my simple California bankruptcy means test calculator).

      You ask, “what number do I compare my income against?” The short answer is, the income limit for Chapter 7 is the median income for your state based on your household size. This is a number that changes from state to state, from time to time, and is based on the overall economy.

      For cases filed after November 2022, the annual median income numbers are in a spreadsheet compiled by the Department of Justice Means Testing. In looking at the California median income, the annual one-person household median income now exceeds $60,000. You can read the specific and updated California median income limits that should be in use at least until the middle of 2023.

      Miscellaneous Bankruptcy Means Test Factoids and FAQ

      Does means test income count just me, or my spouse also?

      This comes up all the time. A couple is married, but only one of them is filing bankruptcy. This is where community property comes in. California Family Code Section 760 says that everything acquired by one spouse during the marriage is the property of both. Or put differently, both spouses’ paychecks, even though it has each name on it and maybe the other can’t spend it, is counted in the current monthly income of both spouses. This is regardless of which spouse files bankruptcy.

      Now, it’s true that your spouse doesn’t have to file bankruptcy with you. But even if they aren’t, the chances are very strong that your spouse’s income will count also. And this counts not just your spouse’s pay, but presumably all income from any source, including businesses and that Amazon or Etsy storefront.

      If I earn more than the California median income, does that mean I don’t qualify?

      Let’s say you’ve gone back and looked at every single paystub for the last six complete months. You counted all the overtime. You calculated that bonus, and you’ve input that insurance check and those DraftKings winnings. You annualize the number and you’re over the California median income for your household size (or your own state). If you’re over the line, you could still qualify for Chapter 7 bankruptcy.

      Just because you earn a smidge more than the median income limit for the means test doesn’t mean it’s game over. It just means that you need to do the second part of the bankruptcy means test. This is the part where you get to subtract some of your payroll deductions. It’s a combination of a) actual things you pay; and b) ‘standard deductions’ you get to subtract (regardless of what you actually spend).

      For example, federal and state taxes get backed out; voluntary retirement doesn’t. What you actually spend on health insurance counts; a set amount for rent and clothes is given to you regardless of what you actually spend.

      Explaining all the dozens of line-items of deductions is beyond the scope of this document. However, at the end of ten pages or so of taking things away from your gross pay and current monthly income, we reach disposable income.

      It’s possible that your current monthly income is over the state median income limit, but that your disposable income is low enough to still qualify for Chapter 7 bankruptcy.

      Learn about the median income limits
      used to qualify for Chapter 7 bankruptcy
      and try our Means Test Calculator

      So Do I Qualify for Chapter 7

      It’s common to wonder “Do I qualify for Chapter 7” since not everyone does. It’s really a two-step process. Firstly, do you earn under the median income limit for your state and household size. Secondly, if you don’t, is there enough to pull you back under. And thirdly, can you actually afford to repay some of your debt. This may all sound simple, but as you’ll see, there’s a lot of gray to consider. Just like it’s not really a two-step process.

      Note: If you’ve researched bankruptcy information, and the types of bankruptcies, you may have read that Chapter 7 bankruptcy is a faster, cheaper option to discharge debt. It’s not always better.

      Will I qualify for Chapter 7 if I earn more than the median?

      It’s common to wonder “Do I qualify for Chapter 7” even if you earn more than the median. Don’t panic, even if you earn more than the median income for your state and household size. It’s possible that you may still qualify for Chapter 7. The rest of the bankruptcy Means Test massive form requires a series of numbers filled in for expenses. In some cases, these monthly expense are what you truly spend. In others, it requires some standard expense number put out by the Internal Revenue Service. If you spend more than the IRS allowance, that doesn’t count. However, if done properly by a skilled bankruptcy attorney, it can still be possible to be eligible for Chapter 7 even if you make more than the median income.

      Allowable expenses in the means test

      It can be disappointing to learn that some real-life expenses don’t count in the bankruptcy means test. For example, there’s no box in which to put your fantasy football pool, or your season tickets to the Lakers (or opera). More realistically, we have no box for that money you send to your ex but it’s not court-ordered support.

      There is a box for food and clothes, but you get what the government averages give you, and that’s all. If you spend more than that, you’ve got an uphill battle ahead to prove why that should be allowable. An experienced bankruptcy lawyer will get to know you and your situation, and maybe think of a box that is a good fit for an expense that you may not have considered.

      Household Size and the Means Test

      Household size is a key component in the bankruptcy means test. It’s possible to pass the means test with a larger number, but not be under the income limit with a smaller household size. How many to use for isn’t always clear. For example, if you live with roommates, do you count their income as “heads on beds” even though they live in your home but you can’t access their income? Or if you have 3 kids you help support (one adult away at college, another adult working part-time living at home, and another under 18 but your ex shares custody), is your household size 1, 2, 3 or 4? These are very fact-specific determinations; there is no set answer. Contact a bankruptcy attorney to guide you through the means test.

      The One Weird Trick to Passing the Means Test

      Here it is. One weird trick to getting under the median income limit and passing the means test. And in a word, this is it: timing. In general, maybe you can’t control your pay, you can’t control your income, you can’t turn down overtime. But unless a creditor is about to garnish or foreclose or some other terrible thing, what you can control is when you file bankruptcy. And that has consequences… one of which could be positive if your goal is to get under the limit and file Chapter 7.

      An Online Bankruptcy Means Test Calculator Says I Don’t Qualify

      This lawyer will want to complete the means test

      First of all, don’t buy into those online bankruptcy means test calculators. I won’t, even if you swear it’s accurate. They’re not always spot-on, and every penny counts. Even if the means test calculator is using the correct California median income limits (or wherever), chances are that you didn’t input your FICA deductions, state income tax, (and others) for each paycheck. In the real world, that’s what we have to do. It never hurts to double-check. In fact, I’ll insist upon it.

      So, I will want to manually input all the numbers myself to be certain if you. There are lots of nuances a skilled bankruptcy lawyer can discern. It’s quite possible that after an experienced professional completes the means test you may pass where you thought you didn’t.

      Still, maybe after we plug in all the numbers, you don’t qualify for Chapter 7. No matter how skillfully done, it just might be the truth that you don’t meet the eligibility for the bankruptcy means test for Chapter 7 right now.

      Timing is everything.

      The good news is that someone who isn’t eligible for Chapter 7 now might qualify in the future. Heck, it’s possible you didn’t pass this month, but may next month. There is a strategy in timing, and one element we control is when we choose to file bankruptcy.

      To repeat something you’ve heard a lot by now, if we file your bankruptcy case today, we’re using the last six months. But guess what: filing bankruptcy next month will be a different six months than the current hand we’ve been dealt. If we file bankruptcy in seven months from now, that’s potentially an entirely different six months.

      How does “When” Factor into the Bankruptcy Means Test?

      One element of the Chapter 7 means test is which pay stubs to use for proof of income. The Bankruptcy Code defines “Current monthly income” in section 101(10A)(A) as all the income received in the six months before filing. If we wait to file your case now and file it later, that will be a different six months of income, and some of today’s “old” income will no longer count.

      Warning: there’s a very real downside if you choose to wait. You’re not protected from your creditors until you file. That means they can continue to harass you, give you a lawsuit, garnish your wages, foreclose on your house, and make your life miserable while we wait for the ideal time to strike. You really want to meet with a bankruptcy attorney as soon as possible. Contact me now and let’s chat.

      What’s the worst that can happen if I file Chapter 7 anyway

      If you don’t qualify, omit some of your income, or use the wrong household size, and file Chapter 7 bankruptcy anyway, the Department of Justice will send you a very official letter. It’ll state that in your case the presumption of abuse arises. Bankruptcy abuse is bad. It will then likely file a motion to dismiss the case, and you lose all that time and money. And out all that money, you’ll still need a bankruptcy.

      I’m not eligible for Chapter 7, Can I Still File Bankruptcy

      Not everyone is eligible for Chapter 7. However, even if you don’t pass the means test for Chapter 7, you still deserve debt relief. Consequently, there’s a bankruptcy option for you. You can file bankruptcy under Chapter 13.

      Chapter 13 bankruptcy isn’t terrible: it’s government-operated debt consolidation. You make some payments on your debt, freeze interest so you’re not paying minimums forever, and are protected from lawsuits. You’ll definitely want an experienced bankruptcy lawyer, and guess what: I’ve done hundreds of these.

      Contact us now and let me run your means test

      Reach out to me now. I can complete the bankruptcy means test for Chapter 7. You don’t need to commit to a full bankruptcy. Let’s just see if with all my experience I can get you under the income limits to pass the means test and if you qualify. If you continue with us, we’ll subtract the means test fee from the bankruptcy cost. Call or email — no obligation — and let’s set it up right now.

        open door to easier bankruptcy forgiveness of student loans

        Student Loan Forgiveness in Bankruptcy: Top Keys for DOJ Guidance

        Explaining DOJ Guidance on Student Loan Forgiveness in Bankruptcy

        Bankruptcy attorney explains new DOJ guidance from the Biden Justice Department to make it easier to get student loan forgiveness in bankruptcy

        Yesterday, the Justice Department announced a new plan for student loan forgiveness in bankruptcy. The change could make it easier for people to eliminate — or “discharge”– student loan debt and to finally achieve student loan forgiveness and a fresh start in bankruptcy. Here is what it all means.

        Current law of student loans in bankruptcy

        The way things are right now, student loans in bankruptcy are almost impossible to eliminate. This is because Congress has added a requirement to show not just hardship (as many people in bankruptcy experience), but an undue hardship. Courts have interpreted this very strictly, and, as a result, it’s extremely difficult to discharge student loans in bankruptcy.

        Does the Biden student loan initiative change bankruptcy law?

        Student loan debt in bankruptcy
        Student loan forgiveness may now be easier to achieve in bankruptcy

        No, the Biden student loan forgiveness plan does not change the law. That would take an act of Congress, literally. Unlike other Biden administration plans on student loan forgiveness, which have faced legal challenges, this current plan doesn’t change existing law or otherwise change existing contract law. It’s merely guidance from the head of the executive branch to the Department of Justice, in the executive branch, on how it can try to steer student loan discharge bankruptcy cases.

        So the Department of Justice decides student loan forgiveness?

        Bankruptcy judges make the ultimate decisions about student loan dischargability. The Biden administration plan for student loans in bankruptcy doesn’t change that. It just intends to make it easier for student loan forgiveness in bankruptcy by issuing recommendations to the bankruptcy court.

        Then what does the Dept of Justice have to do with bankruptcy?

        The Department of Justice is very involved in the bankruptcy process. One might think that the IRS is the government agency that rules bankruptcy, because they’re both connected to money. However, the DOJ administers the bankruptcy process through various trustees.

        Under the arm of the DOJ, the United States Trustee is the program which ensures the integrity of the bankruptcy program by prosecuting fraud, perjury, hidden assets, and other bankruptcy crimes. This is why the 341(a) Meeting of Creditors is so critical in every case, and why you should read my 12 crucial tips of do’s and don’ts before filing bankruptcy. But back to the DOJ.

        In other words, the Department of Justice doesn’t decide student loans in bankruptcy. However, under the Biden process for bankruptcy and student loans, the DOJ and Department of Education (also in the executive branch) would review bankruptcy cases with student loan discharge issues. They would then give the bankruptcy judge the agencies’ thumbs-up or thumbs-down.

        Biden student loan forgiveness bankruptcy
        The new student loan forgiveness in bankruptcy opens the door to an easier path to discharge

        To get there, the DOJ and Dept of Ed would review a few key factors to determine whether they will recommend discharge to the bankruptcy judge, who ultimately makes the final decision. Bankruptcy judges are independent thinkers who deliberate, consider applicable law, and provide much thought to the cases and the unique facts before them. It’s not clear how much weight bankruptcy judges will give to this government recommendation, as each judge and each case is different.

        The factors the Dept of Justice and Dept of Education reviews for student loan discharge

        Consistent with current case law of Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2nd Cir 1987), the agencies will review factors to determine if they will recommend discharge to the bankruptcy judge. It’s not all or nothing, as a partial discharge of student loan debt is possible. In re Saxman, 325 F.3d 1168 (9th Cir. 2003). These factors, in no particular order or weighting known at this point, are:

        Present ability to pay

        First, to evaluate this factor, DOJ attorneys will compare debtor’s expenses to two different things.

        1. To start off, the IRS has standards about what is considered reasonable expenses, and the Justice Department will compare those against the debtor’s bankruptcy petition and schedules.
        2. Next, assuming expenses are “reasonable,” Justice Department lawyers will compare debtor’s budget expenses to debtor’s income. If expenses exceed income, this step is satisfied.
        Future ability to pay

        Second, the Justice Department attorneys will then review various factors such as the debtor’s age, unemployment history, education status, and others. Assessing these variables, and based upon the debtor’s unique circumstances, the DOJ will try to predict whether it is likely that debtor’s financial position will stay the same, making it hard to repay student loans in the future. If they exist, certain variables are considered presumptions for future inability to pay.

        These include if the debtor: is 65 years of age or older; has a disability or chronic illness which impacts earning potential; has been unemployed 5 of last 10 years; has failed to get a degree in the field the student loan debt was for; has had the student loan in “payment” status for at least ten years. These factors create a presumption, and as always, can be rebutted.

        Good faith efforts

        Third, the Department of Justice will look at whether the debtor has made a good faith effort to repay the debts. Did the person contact their student loan servicer or provider for repayment options? Did they try to repay the debt? Have they responsibly managed their expenses? Was there enrollment in an income-based repayment plan? If not, is there a good reason?

        At least one of the following steps can be evidence to demonstrate good faith: making a payment; applying for a deferment or forbearance; applying for an IDRP loan or federal consolidation loan; responding to outreach from a student loan servicer or collector for the student loan debt; engaging with the Department of Education or one of their loan servicers about payment options, forbearance or deferment options, or loan consolidation; engaging with a third-party debtor believed would help them manage their student loan debt.

        The good faith standard also looks at whether the debtor’s efforts to obtain employment, maximize income, and minimize expenses.

        Assets of Debtor

        Lastly, the Justice Department will analyze debtor’s assets. Just because a debtor happens to own a home or other real estate shouldn’t be slam-dunk evidence that there’s a lack of undue hardship. However, the DOJ can look at and suggest debtor liquidated assets which are not necessary for the support of debtor and their dependents’ support and welfare. Exempt property does not escape analysis, but Dept of Justice lawyers are cautioned about using it in an undue hardship analysis.

        Can I reopen an old bankruptcy case and try to discharge my student loans under the new Justice Department guidelines?

        The new procedures and standards are only for future cases. If you filed a bankruptcy with student loans in the past, you cannot apply these new guidelines to the old bankruptcy. Footnote 22 of the DOJ guidelines:

        This memorandum applies only to future bankruptcy proceedings, as well as (wherever practical) matters pending as of the date of this Guidance. This Guidance is an internal Department of Justice policy directed at Department components and employees. Accordingly, it is not intended to and does not create any rights, substantive or procedural, enforceable at law by any party in any matter.

        However, while you cannot open a old bankruptcy to apply this Justice Dept guidance, you may be able to try to discharge them in a new bankruptcy. As there are time requirements you have to wait between filing bankruptcy of various chapters, consult with a bankruptcy attorney to discuss your specifics.

        Procedurally, does the new DOJ guidance on student loan bankruptcy automatically happen for all filings, or is action needed?

        A few things have to happen to kick off the Biden student loan bankruptcy process. First, of course, the person, or debtor, has to file bankruptcy. Note that this Biden student loan program doesn’t change the median income eligibility requirements for Chapter 7 and the means test. Someone still has to qualify for Chapter 7 bankruptcy. The alternative would be a solution with the student loans in Chapter 13, which can still be beneficial.

        Next, in the Chapter 7 bankruptcy, the student loan discharge process is not automatic. The debtor has to file additional paperwork, which is like suing the student loan lender in something called an adversary proceeding. It’s additional time and work, and if there is a bankruptcy lawyer involved (and there really should be), this will likely mean contracting for these extra services and an additional fee.

        Finally, after the adversary proceeding has been filed and served on the student loan company, there is an attestation form the debtor completes and submits to the government. The Department of Justice and Education Department will then coordinate their resources to help determine their recommendation to the bankruptcy judge.

        Results not guaranteed, but there’s hope

        We really don’t know how successful this new Biden student loan bankruptcy guidance will be. You have to qualify for bankruptcy, then the government has to make a recommendation, and then a judge decides.

        It’s ultimately unclear how cooperative the Department of Justice and Education Department will be with student loan borrowers under this new bankruptcy process. However, there is tremendous potential for the government applying the process with an eye on compassion and working with the borrowers who most need debt relief, a fresh start, and student loan forgiveness.

        If you have student loan debt and think you fit the above factors and are in Los Angeles County, Orange County, or Ventura County, please contact me for a case evaluation. Thank you for reading.

        time of bankruptcy filing determines homestead exemption

        9th Cir: To Avoid a Judgment Lien, Use Exemptions at this Time

        9th Circuit: Lien Avoidance Homestead Determined at Time of Bankruptcy Filing

        If someone wants to avoid a judgment lien in bankruptcy, is the homestead exemption the one at the time the lien attached, or at the time of the bankruptcy filing? The Ninth Circuit Court of Appeals has recently weighed in, and the answer can affect thousands of dollars of liens on your home.

        Why it matters

        Liens in bankruptcy don’t usually go away. But there are times we bankruptcy lawyers can reduce or avoid liens. You may have heard that the California homestead exemption got a massive increase in 2021. This protects more home equity than ever before for people filing bankruptcy.

        Now couple that with the fact that some liens in bankruptcy can be avoided if they impair an exemption. So, the bigger the exemption, the better the chances you can avoid a judgment lien and make thousands — or tens of thousands — of dollars of judgment liens disappear forever.

        It’s very common for bankruptcy attorneys to be asked to remove an old judgment lien from a property. This can be done by reopening an old bankruptcy case where the lien then existed but wasn’t known, or filing a new case if the lien now impairs an exemption. But for a new case on an old lien, given that the homestead law just changed; there can be confusion which timing — and exemption amount — is used.

        The question then is: to determine if the judgment lien impairs an exemption (a simple math problem), do we use the puny California homestead exemption at the time of the lien attaching where the lien won’t impair an exemption? Or the massively humongous homestead at the time of filing? It will determine the very question as to whether the lien can be removed in bankruptcy.

        The Ninth Circuit, citing the Supreme Court, clarified which timing counts

        In the battle of the clock, bankruptcy lawyers fight over which timing to use. The Ninth Circuit Court of Appeals just clarified the answer. It ruled that, “we must look to the amount of the homestead exemption that Boskoski could have claimed if, as Section 522(f) commands, the Greek Village lien against his property is disregarded.” Barclay v. Boskoski, WL 16911862 (9th Cir, Nov. 14, 2022).

        In doing so, the Ninth Circuit relied on the U.S Supreme Court case of Owen v Owen, 500 US 305 (Supreme Court, 1991). The Owen case involved a 522(f) lien avoidance issue also. In that case, a judgment was entered against debtor. Creditor then recorded a lien against debtor’s property, and then state law changed to better protect debtor with a homestead exemption.

        The Supreme Court ruled, “To determine the application of § 522(f) they ask not whether the lien impairs an exemption to which the debtor is in fact entitled, but whether it impairs an exemption to which he would have been entitled but for the lien itself.” Id. at 310-311. Or put differently, the language of 522f looks to the exemption the debtor would have been entitled but for the judgment lien.

        And if there was no “old” judgment lien, the debtor “would be entitled” to today’s (larger) California homestead exemption. And that exemption is large enough where the lien would impair the exemption, and therefore can be avoided by 522(f).

        A note about Wolfe v Jacobson

        The creditor here, Barclay, argued that the Ninth Circuit was bound by Wolfe v Jacobson, 676 F.3d 1193, 1198 (9th Cir, 2012). It wanted “the entire state law” followed, per Jacobson at 1199. This Jacobson reading would have had the Barclay appellate court “apply all limitations that a state places on its exemptions when conducting the Bankruptcy Code’s lien avoidance calculation—including California’s limitations on the application of its homestead exemption.”

        But the Ninth Circuit avoided that, and then pointed back to Owen, quoting the Supreme Court: “the Bankruptcy Code’s policy of permitting state-defined exemptions is not ‘absolute.'” Id. at 313. It found that the Owen case, involving lien avoidance, was a closer match than Jacobson, which doesn’t.

        The 9th Circuit continued: “Anticipating the issue we address today, the Court held that ‘it is not inconsistent’ for the Code to allow states to define their own exemptions but ‘to have a policy disfavoring the impingement of certain types of liens upon exemptions, whether federal- or state-created.'”

        In doing so, the Ninth Circuit in Barclay distanced itself further from Jacobson. Note that just a few months ago, new California SB1099 law was passed, which contained provisions which some speculate will limit Jacobson in other areas. By going out of its way to distinguish Barclay from it, it seems the Ninth Circuit is eroding the Jacobson holding without overturning it (yet).

        The Ninth Circuit Already Ruled on Timing of Exemptions

        The In re Barclay ruling is consistent with another case the Ninth Circuit affirmed on a very similar topic.

        “It is well-established that the nature and extent of exemptions is determined as of the date that the bankruptcy petition is filed.” In re Chiu, 266 B.R. 743, 751 (9th Cir BAP, 1999), later affirmed, 304 F.3d. 905 (9th Circuit Court of Appeals, 2002), citing White v Stump, 266 U.S. 310, 313 (Supreme Court, 1924).

        The Ninth Circuit in Barclay vs Boskoski, without going into much detail, gave a hat tip in passing to Stump above and its “snapshot rule.”

        So, everything points in the same direction and lands at the same place. Exemptions are decided at the time of filing, and not the time of the (much) earlier lien attaching. This is consistent with the holdings of the 9th Circuit in Chiu, the Supreme Court in White v Stump, and the Supreme Court in Owen, which got there using different rationale and analysis.

        All in all, good news for debtors!