Thu, 20 Nov 2025 10:35:57 -0800WeeblySat, 09 Jun 2012 21:18:55 GMThttp://www.bigbylaw.com/bigby-law-office-blog/check-your-checking-account-before-you-file-bankruptcy
Under U.S. Bankruptcy code section 541, the commencement of a bankruptcy case creates a concept called an "estate". The "estate", consists of all property in which the debtor holds an equitable or legal interest, wherever located and by whomever held. The estate is strictly determined as of the date the bankruptcy petition is filed. Therefore, money held in the debtor's bank account on the date he or she filed bankruptcy is considered part of the "estate". Any transfer out of that "estate" may be recovered by the trustee. The United States Supreme Court has held that a transfer by ordinary check occurs, not on the date that it is presented to the creditor (or payee) as payment, but on the date the bank honors it. 

When a person files a voluntary petition for bankruptcy and has a balance in their checking account, those funds are subject to being taken by the court appointed bankruptcy trustee and distributed to all creditors having claims. This is true even if there are still outstanding checks that have not yet cleared the account. Furthermore, if after the date the bankruptcy is filed, the bank honors checks that have previously been written, the debtor may have to repay those funds to the trustee. In some states, such as Oklahoma, debtors are entitled to exemption of funds held in the bank account up to 75% of wages earned in the previous ninety days. However, if the funds are not wages they are not exempt even in Oklahoma. 

The fact that it was the bank that paid funds out of the checking account and not the debtor who took the funds is not a good defense. Additionally, the fact the debtor no longer has the funds in the account to pay to the trustee is not a good defense. The Court can order that the debtor repay the value of the funds paid out by the bank on the previously written but late honored checks. While the trustee could go after the creditor who presented the checks in a separate adversary proceeding, it is generally easier for him or her to go after the broke debtor. This can be done with a simple motion in the bankruptcy case as opposed to the more burdensome adversary proceeding that the trustee would have to use against the third-party creditors who got the funds. 

In the end, it is a debtor's responsibility to make sure that any checks written on the eve of bankruptcy have cleared before the case is filed. While this precaution will not insulate creditors from preference actions, it will shield debtors from actions to recover estate property. Debtors may also want to consider whether using cashier's checks, rather than ordinary checks, to pay bills on the eve of bankruptcy offers any benefit under applicable state and federal law. This would get money out of the account prior to the bankruptcy filing and thus not part of the bankruptcy estate. Anyone considering filing bankruptcy should consult a competent bankruptcy attorney.]]>Sat, 19 May 2012 17:13:31 GMThttp://www.bigbylaw.com/bigby-law-office-blog/can-there-ever-be-too-much-charity-in-bankruptcy-apparently-yes
According to a recent case decided by the U.S. Bankruptcy Court of the Appellant Panel for the 10th Circuit, a person can give too much.  Churches and other charitable organizations can be forced to return a portion of the tithes and gifts given up to two years prior if the contributor later files for bankruptcy.  In re Mcgough,  Bap No. CO-11-038 filed March 14, 2012.  Before Michael, Thurman, and Karlin, Bankruptcy Judges.

Bankruptcy law allows a bankruptcy trustees to avoid and recover certain transfers made by debtors prior to the filing of their bankruptcy petition on the ground that the transfers were either actually or constructively fraudulent. Thus, a trustee may recover, from the charitable organization, any transfer made by the debtor within two years of filing of the bankruptcy petition, if the debtor either: 1) actually intended to defraud creditors in making the transfer (“actual” fraud); or 2) received less than “a reasonably equivalent value” in exchange, and was insolvent when the transfer was made (“constructive”fraud). There are no exceptions to avoidance of a transfer that a trustee establishes was made with actual fraudulent intent. However, a debtor’s constructively fraudulent charitable donation cannot be avoided by the trustee if the transferee establishes that: 1) it is a qualified religious or charitable entity; and 2) the amount of the donation is not more than 15 percent of the debtor’s gross annual income in the year of the transfer.

The 10th Circuit Bankruptcy Court concluded, that: 1) social security benefits are not included in the determination of the Debtors’ “gross annual income;” 2) charitable donations are aggregated annually in determining whether they exceed 15% of annual income; and 3) only that portion of the aggregated transfers that exceeds the 15% threshold may be avoided. 

However, part three is not law across the entire United States.  In 1999 a different bankruptcy court addressed the safe harbor provision in the context of a debtor’s single contribution of $10,000 to Louisiana State University during a year in which his gross annual income was $43,669. That court concluded that the trustee could avoid the entire $10,000 transfer, as opposed to $3,450, which was the amount by which the donation exceeded 15% of the debtor’s gross annual income.   See: Murray v. La. State Univ. Found. (In re Zohdi), 234 B.R. 371 (Bankr. M.D.La. 1999).

In the 10th Circuit case, the Bankruptcy Court  avoided only the amount of the Debtors’ annual charitable contributions that exceeded 15% of their gross annual income.  Thus the Church only had to return the portion of the contributions that exceeded 15% of the church members gross annual income.  However, the social security received by the debtor was not counted as gross annual income to determine the 15% threshold.  Thus it would appear that all contributions given by a person who only received social security benefits my be avoid by the trustee and must be turned over to the trustee by the church or charity if that contributor later files bankruptcy.  

In refusing to follow the Zohdi case, the 10th Circuit Court stated that in Chapter 13 cases when a debtor’s disposable income is determined the debtors may also deduct their charitable donations “in an amount not to exceed” 15% of their gross income. This provision plainly reduces disposable income in Chapter 13 cases by an amount up to 15% of gross income. As such, Chapter 13 debtors’ post-filing charitable contributions are deductible up to the threshold amount and are considered to be beyond the bankruptcy court’s scrutiny. Similarly interpreting section 548(a)(2) to allow a charitable organization to retain contributions up to 15% of the debtor’s gross annual income harmonizes these two provisions by protecting both pre- and post-petition charitable donations up to a maximum of 15% of an individual debtor’s gross annual income.  

As a practicable matter this situation does not arise often in bankruptcy.  Generally, a debtor who is having financial problems which ultimately cause him or her to file bankruptcy, does not give contributions that exceed 15% of their annual income.  The problem may arise if aggressive trustees start going after social security recipients contributions.  If a person is only getting social security and that income is not legally considered “gross annual income” then any amount they give exceeds the 15% threshold and may be avoided by the trustee.  This could cause the Churches and Charities much grief if they are required to return contributions received up to two years prior. ]]>Fri, 11 May 2012 21:03:13 GMThttp://www.bigbylaw.com/bigby-law-office-blog/discharging-student-loan-in-bankruptcy
Congress has looked increasingly with disfavor on the discharge of student loans in bankruptcy and has progressively stopped its availability. The presumption of non-dischargeability of student loans reflects the view that student loans are "enabling loans" allowing individuals to improve their own human capital and increase their income potential, but the fruits of the student loans (i.e., the education) cannot be garnished or repossess in case of default. 

Limitations on the dischargeability of student loans serve two purposes: (1) "preventing abuses of the educational loan system by restricting the ability to discharge a student loan shortly after a student's graduation," and (2) "safeguarding the financial integrity of governmental entities and nonprofit institutions that participate in educational loan programs. 

In 1998, Congress amended § 523 of the Bankruptcy Code to its current form, eliminating the option for student loan to be discharge after seven years. Now under current Bankruptcy Rules, the debtor must prove the elements of "undue hardship" in an adversary proceeding to have student loans discharged. An adversary proceeding is a sub-part of a bankruptcy case that has all the trappings of civil litigation. To initiate an adversary proceeding, a debtor must fulfill the highly specific service of process requirements. First, the debtor must file a complaint, which must be served alongside a summons on the creditor-defendant.  Where the creditor is a corporation, service of the complaint requires a summons delivered upon "an officer, a managing or general agent, or to any agent authorized by appointment or by law to receive service of process. The obligation to answer the adversary proceeding complaint is not triggered until the complaint is "duly served.  Once duly served, the creditor-defendant has thirty days to file its answer and thirty-five days if the creditor is the United States.  Without proper service, the defendant cannot be said to have "failed to plead or otherwise defend as provided by the rules.

To prove "undue hardship," the debtor must establish three elements: (1) the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living if forced to repay the loans; (2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period. (3) Finally, debtors typically must prove that they have made good faith efforts to repay their student loan debt before filing bankruptcy. 

There are some student loans that this "undue hardship" standard does not apply. One such loan is a HEAL loan.  HEAL Student Loan stands for "Health Education Assistance Loan" and it is designed for those wanting to study health related topics such as chiropody, health admin and psychology. 

In contrast to the 523 loans, the discharge of the HEAL loan is governed by the unconscionability standard at title 42 U.S.C. § 292f(g): Notwithstanding any other provision of Federal or State law, a debt that is a loan insured under the [HEAL loan program] may be released by a discharge in bankruptcy under any chapter of Title 11, only if such discharge is granted --

(1) after the expiration of the seven-year period beginning on the first date when repayment of such loan is required, exclusive of any period after such date in which the obligation to pay installments on the loan is suspended;

(2) upon a finding by the Bankruptcy Court that the nondischarge of such debt would be unconscionable; and

(3) upon the condition that the Secretary shall not have waived the Secretary's rights to apply subsection (f) of this section to the borrower and the discharged debt. 

In requiring that HEAL loans may only be discharged when "the nondischarge of such debt would be unconscionable," Congress did not provide a definition of unconscionability. 42 U.S.C., § 292f(g). Court interpreting this statute have applied the Supreme Court's maxim that "[i]n the absence of an indication to the contrary, words in a statute are assumed to bear their `ordinary, contemporary, common meaning.'"As such, "unconscionable" has been defined as "excessive," "exorbitant," "lying outside the limits of what is reasonable or acceptable," "shockingly unfair, harsh, or unjust," or "outrageous. It is apparent that a single test cannot reasonably take into account all of the considerations relevant to a determination of unconscionability in every case. Thus, most bankruptcy courts will examine the totality of the facts and circumstances surrounding the debtor and the obligation to determine whether non-discharge of the obligation would be unconscionable.

Factors which bankruptcy courts have recognized as relevant in this analysis include (1) the debtor's "income, earning ability, health, educational background, dependents, age, accumulated wealth, and professional degree," In re Rice, 78 F.3d at 1149; (2) the debtor's "claimed expenses and standard of living, with a view toward ascertaining whether the debtor has attempted to minimize the expenses of himself and his dependents," id.; (3) whether the debtor's "current situation is likely to continue or improve," including "whether the debtor has attempted to maximize his income by seeking or obtaining stable employment commensurate with his educational background and abilities," and "whether the debtor is capable of supplementing his income through secondary part-time or seasonal employment," even if already employed full time, id.;(4) whether the debtor's dependents "are, or could be, contributing financially to their own support," id.; (5) the amount of the debt and the rate at which interest accrues, id.; and finally, (6) the debtor's "good faith," i.e. his role in allowing the debt to accrue including "previous efforts to repay the HEAL obligation, including the debtor's financial situation over the course of time when payments were due; the debtor's voluntary undertaking of additional financial burdens despite his knowledge of his outstanding HEAL debt; and the percentage of the debtor's total indebtedness represented by student loans," id. This list, of course, is not exclusive.

The point that should be gleaned from this article is don't just automatically assume that a student loan is not dischargeable in bankruptcy.  Always check with a competent Bankruptcy Attorney.  Your facts and circumstances may justify requesting a discharge of the student loan.]]>Sat, 12 Nov 2011 16:46:37 GMThttp://www.bigbylaw.com/bigby-law-office-blog/can-a-military-enlistment-bonus-repayment-debt-be-discharged-in-bankruptcyI had a question arise recently regarding a military enlistment bonus debt.  The terms of enlistment were not completed so that part of the bonus has to be paid back.  The question was whether that debt could be discharged in bankruptcy.  As we know, the government makes it hard to get out of a debt owed to them (taxes and student loans for example).  


According to Title 37 U.S.C. 303a(e)  it appears such a debt will be dischargeable in bankruptcy if 5 years have passed since the date of the termination of the bonus agreement or contract on which the debt is based.  Also, if there was no agreement but five years have passed since  the date of termination of the service on which the debt is based, it may be dischargeable.  Therefore, if the government is trying to collect on a overpaid military enlistment bonus and it has been five years, a bankruptcy may benefit you.  Seek good legal counsel to determine your options.
]]>Sat, 05 Nov 2011 20:26:38 GMThttp://www.bigbylaw.com/bigby-law-office-blog/good-day1Having never blogged before, this should be a learning experience.  I hope to provide relevant legal commentary about legal issues. Comments are welcome.  ]]>