Tag Archives: Sixth Circuit

Michigan Bankruptcy Exemptions Found Constitutional by the Sixth Circuit

An important new decisionRichardson v. Schafer, was handed down this week by the Sixth Circuit Court of Appeals finding that Michigan’s bankruptcy exemptions are, in fact, Constitutional, contrary to the arguments made by Western District of Michigan Chapter 7 Bankruptcy Trustee Thomas Richardson.

The argument centered on Michigan’s state bankruptcy exemption scheme, and, in particular, on the homestead exemption, which allows $30,000 of equity in a person’s primary residence to be exempted (that is, protected from liquidation/sale by the Chapter 7 bankruptcy Trustee), or up to $45,000 if the homeowner filing for bankruptcy is over the age of 65.

Alternatively, the Federal exemptions allow a homestead exemption of just(currently) $21,625.00.

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Is Social Security “Income” in Bankruptcy?

Social Security benefits, both age benefits and disability benefits, are and also are NOT considered “income” within the bankruptcy process in a couple of different ways.

Income is considered in the bankruptcy process both as a measure of a debtor’s eligibility for Chapter 7 (as opposed to Chapter 13) bankruptcy and as a measure of the debtor’s ability to repay creditors some portion of the debt owed to them on monthly average basis.

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What Happens to Alimony or Child-Support Payments in Bankruptcy in Michigan?

Child support and other domestic support obligations are generally not dischargeable in Michigan Chapter 7  or Chapter 13 bankruptcy. However, such debts may be repaid according to the debtor’s ability to pay based upon his or her actual income over a period of 3-5 years in a Chapter 13 bankruptcy. Additionally, there may be other factors that may still make a Michigan bankruptcy useful to someone behind in child support or other domestic support payments.

Click here to read our full article on the new Michigan bankruptcy blog of The Hilla Law Firm, PLLC.

Can Your Attorney Advise You to Incur More Debt Prior to Filing Bankruptcy?

It depends where you live.

This week, the Fifth Circuit decided that a provision of the Bankruptcy Code added by the 2005 BAPCPA amendments (which were largely drafted by financial industry lobbyists), Section 526(a)(4), prohibits attorneys from advising their clients to incur more debt prior to filing for bankruptcy.

Section 526(a)(4) reads: “A debt relief agency shall not … advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title or to pay an attorney or bankruptcy petition preparer fee or charge for services performed as part of preparing for or representing a debtor in a case under this title.”

As reported by CreditSlips, the Fifth Circuit decided, contrary to a decision on the same language by the 8th Circuit, that this was not an unconstitutional restriction on the free speech of attorneys under the First Amendment. The court made this decision, despite the clear language of the statute, which broadly prohibits the proffering of this legal advice, period, using a technique of judicial statutory interpretation called the “doctrine of constitutional avoidance.” This so-called “doctrine” states, basically, that, if a given interpretation of a statute would cause Constitutional problems, it would be interpreted differently, unless Congress clearly determined it should not.

In the case of Section 526(a)(4), according to the Fifth Circuit, apparently that means that, since a plain reading of the statute appears to include an unconstitutional prohibition on the free speech of attorneys, it should just be interpreted as not prohibiting free speech. Uh, right. The Fifth accomplished this by reading into the statute’s use of the phrase “in contemplation of” an intent to abuse the bankruptcy system. So, basically, in the Fifth Circuit, if a debtor’s attorney intends to abuse the bankruptcy system by advising a debtor to incur more debt prior to filing, that’s not a First Amendment violation. But, if they don’t intend to abuse the system in doing so, it is. Good luck figuring out where the intent exists and where it doesn’t, Fifth Circuit Trustees and Judges!

The Eighth Circuit decided the same issue quite differently. The Eighth Circuit found that the statute was indeed unconstitutionally overbroad in its plain language. It noted that there are many cases where it is indeed appropriate for a debtor’s attorney to advise a client to take on more debt prior to filing bankruptcy.

In my opinion, in these cases, not only is it appropriate to give this advice but not giving it would be irresponsible on my part as an attorney. For example,  a debtor who, due to job-loss or overwhelming medical expenses, is on the verge of losing his or her home in foreclosure may consider filing a Chapter 13 bankruptcy to make up the payment arrearages and save the home while, also, getting unsecured debt like medical expenses under control. At the same time, the debtor’s car may be on the verge of break-down, requiring a new one imminently. To maintain his or her employment, the debtor may genuinely need a reliable automobile, and, to make the payments under the Chapter 13 plan, the debtor definitely needs to maintain a certain level of income (under Chapter 13, there is an “ability to pay” test for a proposed payment plan). After the filing of the bankruptcy, it may be very difficult for the debtor to obtain financing for a new car. Under Chapter 13, in particular, it is quite possible to pay a secured debt like an automobile loan outside the plan, or, depending on the price of the car, in full or in part inside the plan. (The purchase of a very expensive, luxury car would likely be disallowed by the trustee or judge,  but 526(a)(4) doesn’t say, “Don’t advise a client to take on too much debt,” it says, “Don’t advise a client to take on any debt.”) It is therefore in the debtor’s interest and with no intent to defraud anybody to obtain that new car prior to filing.

The Sixth Circuit, which governs here in Michigan, has not made a similar ruling. Only the Fifth and Eighth Circuits have, so there is a split at the appellate level on this issue. Until (and if) this issue reaches the Supreme Court or the Sixth Circuit makes a similar decision one way or the other, the proffering of such advice and pre-bankruptcy planning in general will continue to be a tricky business in Michigan.

If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or john@hillalaw.com to schedule a free, initial consultation.

UPDATE:

Since this post was first drafted, the US Supreme Court has, in a case titled Milavetz, Gallop & Milavetz v. United States, that, in short, it is permissible for a bankruptcy attorney to advise a client to incur more debt so long as the “impelling reason” for the advice is not the client’s prospective bankruptcy. This is just as confusing as it sounds. See here for an excellent analysis and further explanation.