One of the putative motivations for enacting Obamacare (a.k.a. The Patient Protection And Affordable Care Act; have fun reading it, and make sure you have industrial quantities of coffee on hand) was to ensure that no one would be financially ruined by a health care catastrophe.  After all, many bankruptcies are filed because of massive medical debt.  How have things played out in the Obamacare regime?

I.  Obamacare And Part-time Employment

Lately the White House ― well, not the building, but the chap who lives and works inside it ― has been claiming that the economy has improved considerably in the last year.  For example, in his recent State of the Union address, the President stated:  “Tonight, after a breakthrough year for America, our economy is growing and creating jobs at the fastest pace since 1999.”

This ostensibly rosy economic diagnosis doesn’t match with what I see in my practice, nor with the headlines I’ve seen over the last few weeks announcing layoffs at various companies.  (See, e.g., “Big profits, big layoffs: eBay, AmEx to cut jobs”.)  Therefore, I thought I’d look a little deeper into that job creation claim, and the types of jobs that are being created.
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I have already written about discharging student loans in bankruptcy.  As I discussed in that previous blog post, although under special circumstances it is possible to discharge them, it is devilishly hard.

I recently came across an interesting twist on student loans in the bankruptcy context that I thought might interest you.  The setting:  A debtor wants to file for Chapter 7 bankruptcy protection.  The nonfiling spouse died prior to the bankruptcy filing, and left a large student loan debt, for which the debtor did not cosign.  What happens to the student debt?  What happens to the deceased spouse’s other debts?  Can the creditors attach heaven’s streets of gold to satisfy the debts?

I.   Community Property/Community Debt

If you live in a community property state such as California, you can have some liability for your spouse’s debts.  Why?

A.  Dividing The Marital Assets

When a couple gets married in a community property state, all of the assets are divided into three categories:  The husband’s separate property, the wife’s separate property, and the community property.  How is this done?  In the absence of a prenuptial agreement, community property consists of all assets except those assets with which a spouse enters the marriage, those assets a spouse inherits, and the offspring of such assets.  See Cal. Fam. Code § 770.  A moment’s thought reveals that community property must include post-wedding day wages, and anything purchased with those wages, because the wage earner didn’t enter the marriage with the wages or the stuff bought with the wages, and didn’t inherit them.

By default then, a spouse’s separate property is comprised of those assets that that spouse enters the marriage with, anything that spouse inherits, and the offspring of those assets.

Why do we care about this asset taxonomy?  There are two contexts in which this breakdown is important.
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My last post was motivated by an interesting article in the L.A. Times, written by Chris Megerian, Melody Petersen, and Dean Starkman, that discussed the recent ruling by Judge Christopher Klein, the judge in the Stockton, California Chapter 9 bankruptcy.  As you may recall, the ruling put pension payments on the bankruptcy chopping block.

In that post I predicted that more municipalities would seek Chapter 9 bankruptcy protection due to unsustainable public retirement commitments.  I suspect that Judge Klein’s ruling will add fuel to the Chapter 9 fires.  And I am by no means the only one with that opinion.  In the October 2, 2014 L.A. Times, the perspicacious Melody Petersen reported:

Financially pressed California cities might turn to bankruptcy as a way to cut their increasing pension costs after a judge’s ruling, experts said Thursday.  Analysts from Moody’s Investor Services, a bond rating firm, said that Wednesday’s ruling by a federal judge considering Stockton’s case could open the door for cities to cut retirement obligations — once considered sacrosanct.  In that ruling, Judge Christopher Klein said cities could walk away from their pension obligations — just as they can from other debts.

While I am convinced that other California cities are eventually going to seek Chapter 9 protection — Madhu Ravi’s analysis suggests that an Oakland bankruptcy is on the horizon — there is a very big city in Illinois that I am watching:  Chicago is sitting on the pension obligation edge.  If Chicago were to file, it would undoubtedly displace Detroit as the largest municipal bankruptcy in the country’s history.  How likely is a Chicago bankruptcy?
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One chapter of the Bankruptcy Code that up until the last few years had not gotten much use is Chapter 9.  It is the chapter under which municipalities such as cities and counties file for bankruptcy protection.

On October 13th, 2011, I wrote a post predicting that a wave of municipal bankruptcies would start breaking on our shores.  On August 15th, 2012,  I discussed several municipal bankruptcies that had just been filed.  One of those bankruptcies, the Stockton, California, one has just been in the news because of a dispute over whether Stockton could reduce its payments to CalPERS, the retirement plan for California public employees.

Here’s an excerpt from the L.A. Times article written by Chris Megerian, Melody Petersen, and Dean Starkman, describing the ruling by the bankruptcy judge, Christopher Klein:

A federal bankruptcy judge dealt a serious blow to California’s public employee pension systems by ruling Wednesday that payments for future worker retirements can be reduced when a city declares bankruptcy — just like its other debts.  U.S. Bankruptcy Judge Christopher Klein ruled that bankruptcy law supersedes California pension laws that require cities to fund their workers’ future retirement checks.  “I’ve concluded the pension could be adjusted,” Klein said.

What does that mean for California public employees who work for a municipality that files for Chapter 9 protection?  Quite simply it means that the Rolls Royce retirement plan might end up as more of a Yugo plan.
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Chapter 13 bankruptcy has an important limitation.  If the debtor’s debts are too large, Chapter 13 is unavailable:

Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525, or an individual with regular income and such individual’s spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $383,175  and noncontingent, liquidated, secured debts of less than $1,149,525 may be a debtor under chapter 13 of this title.

11 U.S.C. § 109(e).

By the way, the numbers at the Cornell Law School site to which this links haven’t been updated for some time.  I corrected them in the quote above.  The modified quote is correct as of September 2014.

If either debt ceiling — either the secured, or unsecured — is exceeded, the debtor is ineligible for Chapter 13 protection, and must consider Chapter 11 bankruptcy.  This leads to the following question that was posed by a fellow bankruptcy attorney:

Question:

Suppose a debtor has a mortgage — for simplicity let’s say a first mortgage — that is undersecured, i.e., the value of the house is less than the current balance on the mortgage.  Does the unsecured portion of the mortgage count toward the $383,175 unsecured debt ceiling?

My answer was:  It depends on whether or not the house is the debtor’s principal residence.  But it’s a bit more complicated than you might imagine.  Let’s start with the simpler “nonprincipal residence” scenario.
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What’s in your wallet?  It’s a loan shark!  That’s how many people feel when they consider their ever-increasing debt burden.  Unfortunately, many of those same people continue to feed the shark by patronizing loan sharks.

John Oliver recently skewered loan sharks on his Sunday show.  Jon Healy of the L.A. Times published an article on

Well stapled telephone poleI’d like to mention something I see around Southern California that may show up in other parts of the country:  Ads on telephone poles promising to repair your credit in two weeks.  Are these ads legitimate?  The answer to another question will answer this question.

Suppose the ads were legit.  Do you believe that any

Credit bureauMany of my clients express concern over their ability to obtain credit and take out loans after they have gone through a bankruptcy.  I have written in great detail about the topic, and included tips on rebuilding credit after bankruptcy, so I won’t rehash it here.

Instead, I suggest that if you have gone through a bankruptcy, and are in the process of using my tips for rebuilding credit, you get your credit reports each year and review them for errors.  You can do so at http://www.annualcreditreport.com/.

When you go to the site, focus on the credit reports rather than on any ads that may pop up.  After all, the point is to see what’s going on with your credit, not to purchase goods and services you probably don’t need.

As you review the reports, keep in mind that the reporting bureaus rely on your creditors, and not on you, for their information.  Therefore, if a creditor has sent erroneous data the report will contain errors.  These errors can be fixed.
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church interiorThis is the sixth and last post in a series in which I discuss fraudulent transfers.  This one deals with defenses against fraudulent transfers avoidance actions.

F.         Defenses To Fraudulent Conveyance Avoidance

Aside from the problem of collectability — the recipient of the fraudulent transfer may be an impecunious, judgment-proof person — the trustee may face an insurmountable impediment to a fraudulent transfer avoidance action if the transferee successfully applies the defenses provided in the Bankruptcy Code.

            1.        The Charitable Donation Defense

The first defense to an avoidance action is found in § 548(a)(2):

A transfer of a charitable contribution to a qualified religious or charitable entity or organization shall not be considered to be a transfer covered under paragraph (1)(B) in any case in which —

(A) the amount of that contribution does not exceed 15 percent of the gross annual income of the debtor for the year in which the transfer of the contribution is made; or

(B) the contribution made by a debtor exceeded the percentage amount of gross annual income specified in subparagraph (A), if the transfer was consistent with the practices of the debtor in making charitable contributions.

Thus, the debtor who regular tithes will not hear that the trustee has filed an avoidance action against the church, provided that either the amount tithed is less than 15% of the debtor’s gross income, or if more, then at the level the debtor consistently makes donations.  This comes up most frequently with Mormon clients who are required to contribute at least ten percent of their incomes to the church to remain in good standing.  Not being a Mormon myself, I am basing this assertion on the sense I have gotten from Mormon clients, and from the text at http://mormon.org/faq/church-tithing.  If you are a Mormon and have a different perspective, I mean no offense and have no axe to grind.  In any event, § 548(a)(2) insulates the church from fraudulent transfer avoidance actions.

The types of contributions covered by this defense are just what you might expect, and are listed in §§ 548(d)(3) and (4):

(3) In this section, the term “charitable contribution” means a charitable contribution, as that term is defined in section 170(c) of the Internal Revenue Code of 1986, if that contribution —

(A) is made by a natural person; and

(B) consists of —

(i) a financial instrument (as that term is defined in section 731(c)(2)(C) of the Internal Revenue Code of 1986); or

(ii) cash.

(4) In this section, the term “qualified religious or charitable entity or organization” means —

(A) an entity described in section 170(c)(1) of the Internal Revenue Code of 1986; or

(B) an entity or organization described in section 170(c)(2) of the Internal Revenue Code of 1986.

This means that only legitimate charities qualify for the defense.  “Charities” such as the American Society for the Elimination of the Cuticle will not qualify.  And remember, it’s the recipient of the transfer, not the debtor, who must mount the defense.
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baby's lost his assetsThis post is the fifth in a series in which I discuss fraudulent transfers.  This one deals with the consequences of fraudulent transfers, and the importance of prebankruptcy planning.

E.         Denial Of Discharge And The Loss Of Assets

A discharge may not be available to a debtor who engages in prepetition fraudulent transfers:

The court shall grant the debtor a discharge, unless — . . . the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, . . . or has permitted to be transferred, removed, destroyed . . . — . . . property of the debtor, within one year before the date of the filing of the petition . . .

11 U.S.C. § 727(a)(2)(A)

And as I have discussed in great detail in my previous fraudulent transfer posts, the bankruptcy trustee can avoid the transfers and seize the assets.  Furthermore, once the debtor has transferred the asset, it no longer belongs to the debtor, and cannot be exempted in the debtor’s bankruptcy.
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