“Bar Study” Loan Determined to be Dischargeable

Not to sing my own praises, but I’m quite proud of this one: On October 3, 2012, Judge Carlson in San Francisco issued an order in the adversary proceeding, McGinnis v. Citibank (Bankr. N.D. Cal, Case No. 12-03111), where I represented the Debtor/Plaintiff.

The Debtor is a relatively newly admitted attorney who filed a Chapter 13 case. Among her debt s was approximately $15, 000 in a “bar study loan.” Taking out bar study loans is quite common among lawyers-to-be; such loans cover their bar exam tutoring and living expenses while they’re preparing and awaiting their results. The lender filed a claim in the Debtor’s Chapter 13 case, claiming the loan was a “student loan” and therefore not subject to discharge.

The Debtor initiated the adversary proceeding, claiming that the loan was not a “student loan” as defined by law. It was not intended to cover the costs of attending a Title IV institution; Indeed, there was no “institution” at all; she was engaged in self-study and had tutoring from private “bar prep” companies. Moreover, she was pursuing a professional license, not an academic degree.

Though it had adequate notice, the lender failed to respond to the Debtor’s complaint. Judge Carlson’s Order on October 3 was therefore a “default judgment” and so has little if any value as precedent.

However, I think there’s a lesson here: If you have a bar study loan and are filing a bankruptcy case, be sure to talk to your lawyer about whether or not that’s really a student loan. Also, if you’re in a non-law profession but still took out some kind of loan while you studied for a professional license, that debt may not be a student loan, either.

Unfortunately, under current law, there’s not much I or any other debtors’ attorney can do about student loans. However, there are things at the margins, such as this, where we can make significant inroads.

Jacobson: Big Change to California Homestead Exemption in Chapter 7

“Exemption Laws” are those laws that allow people who file bankruptcy cases to keep certain amounts of certain categories of assets.  Like most states, California (where I practice) has its own set of exemption laws.

If you’re over 65 or disabled, California allows you to keep $175,000 worth of equity in your house.  That’s called the “Homestead Exemption.”

So, for example, if you’re a Californian over 65 and owe $500,000 on your house, and it’s worth $675, 000 or less, then that $175, 000 in equity is fully protected.  If a Trustee in a Chapter 7 case took your house and sold it, she’d have to pay the mortgage holder (the bank) first, and then give you a check for $175, 000 before she had any assets with which to pay your creditors.  That being the case, she’s not going to bother trying.

However, if the house was worth $700, 000, she would be much more likely to go after your house: She would sell it for $700,000, give $500,000 to the bank, give $175,000 to you, and then distribute the remaining $25,000 to your creditors.

A recent Ninth Circuit Court of Appeals decision (Wolfe v. Jacobson, U.S. Court of Appeals, Ninth Circuit, No. 10-60040) stands to have an enormous impact on the bankruptcy cases of people who make use of the Homestead Exemption.

In this case, the Jacobsons, both over 65, had more than $150,000 equity in their home. ($150,000 was the Homestead Exemption amount at the time they filed their case.) A creditor asked for, and the Court granted, permission to proceed with a foreclosure of the home.  The house was sold, the Jacobsons got $150,000, and everything else went to pay off the creditors.

However, the Jacobsons didn’t use that money to buy another house; they put it in the bank to use for ordinary expenses.  The Trustee in their Chapter 7 case then pursued the $150,000, claiming that because the Jacobsons didn’t use it for a new home within six months, it had lost its exempt status.  The Bankruptcy Court and the Bankruptcy Appellate Panel decided against the Trustee, but the Ninth Circuit Court of Appeals reversed those decisions.

An appeal is pending, and a question remains as to whether this applies to sales by the Trustee as well as to sales by creditors, but under this precedent, a debtor who receives proceeds from the sale of his or her house pursuant to the Homestead Exemption, must reinvest those proceeds in to a new home within 6 months or lose those proceeds.

Fighting Fraud In Bankruptcy Act Introduced

On May 24, 2011, Senate Judiciary Committee Chairman Pat Leahy (D-Vermont) introduced the Fighting Fraud in Bankruptcy Act (S. 1054). Among other things, the Act is intended to bolster the ability of the Executive Office of the U. S. Trustee (EOUST) to fight creditor fraud and protect homeowners.

When you file a Chapter 13 bankruptcy case, your creditors must come forward and file a claim with the court in order to receive a port ion of the payment s that your will be making on your Chapter 13 Plan. The EOUST recently reviewed of proofs of claims filed by mortgage servicers, and found that the error rate was ten times higher than what representatives of the mortgage servicing industry had claimed. The EOUST has sought increased sanctions for defective and fraudulent claims, but the mortgage servicing industry has challenged the EOUST’s authority to do so.

The proposed Act clarifies that the U. S. Trustee has a duty to take act ion to remedy credit or abuse of the bankruptcy process. It also allows the court to correct or sanction credit or misconduct. It empowers the U. S. Trustee to establish procedures f or auditing claims, and it requires mortgage lenders to cert if y under penalty of perjury that foreclosure proceedings against active duty military members comply with the Servicemembers Civil Relief Act.

Introducing the bill, Senator Leahy said: “The Fighting Fraud in Bankrupt cy Act is another step forward in the Judiciary Committee’s important efforts to protect American citizens from fraud. As Congress looks at ways to mitigate the foreclosure crisis to reduce its impact on homeowners and the economy, I hope all Senators can agree that the foreclosure process for Americans should be a fair one and one in which there is account ability for fraud or other misconduct. And I hope we can all agree that the integrity of our judicial system is something worth protecting.”

Refiling After Dismissal? Make Sure You Extend the Automatic Stay

If your bankruptcy case is dismissed for any reason and you file a second case within a year, the “Automatic Stay” in the second case is different from the first. (The Automatic Stay is a protection created the moment you file.  It “stays” your creditors from trying to collect on your debts.  It stops lawsuits, foreclosures, garnishments, repossessions, and creditor phone calls and letters.) While the Automatic Stay usually last s indefinitely, in your second bankruptcy case filed within a year, it lasts only 30 days unless you ask the Court to “extend” it.

Generally, this rule exists to stop people from repeatedly filing and dismissing bad bankruptcy cases in order to thwart foreclosure indefinitely.

There’s an extra wrinkle to this rule:  The statute (11 U.S.C. § 362(c)(3)) is ambiguous as to whether the Automatic Stay’s protection terminates only as to you and your property, or if it also terminates as to the property of the “estate” that was created when you filed.  (The “property of the estate” includes all of your assets at the time of filing.  In a Chapter 13 case, it also includes your earnings during the course of your payment plan.)  As a result, a disagreement has arisen among the Circuit Courts, with a majority taking the former approach and a minority taking the latter approach.

The reasoning behind the majority approach is that it preserves the equal treatment of creditors: Let’s say you’re filing your second case within a year, following a dismissal, but fail to extend the Automatic Stay.  You have a house with equity that you want to surrender.  The house becomes property of the estate, and the Trustee takes possession, planning to sell it and distribute any proceeds to your creditors. Under the majority approach, your bank/mortgage holder can’t step in and take the house all for itself; it has to get its share from the Trustee, just like all the other creditors.  But under the minority approach, because there is no Automatic Stay as to the property of the estate, the bank can just step in and take the house all f or itself, leaving the other creditors out in the cold.

In its February 2011 decision In re Reswick (2011 WL 612728), the Bankruptcy Appellate Panel (BAP) for the Ninth Circuit (which includes California) came down on the side of the minority approach.  The facts of Reswick are atypical:  The debtor filed his second case within the year (the first having been dismissed for failure to make Chapter 13 Plan payments), but he did not obtain an extension of the Automatic Stay.  After 30 days elapsed, a creditor, based on a pre-pet it ion lawsuit, started garnishing the debtor’s wages (which, in Chapter 13 cases, are property of the estate). When the debtor sought damages f or violation of the Automatic Stay, the Court found that there was no Automatic St ay and therefore no violation. The BAP agreed.

Thus, the decision in Reswick gives preference to creditors who happen to have obtained pre-pet it ion judgments.  An appeal to the Ninth Circuit Court of Appeals is expected.  For Californians who’ve had one bankruptcy case dismissed and are contemplating a second filing within a year, the lesson of here is clear: Make sure your lawyer knows about your previous case, and make sure he or she seeks an extension of the Automatic Stay.