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As a Sacramento bankruptcy attorney I have previously written about student loans and filing a Chapter 7 or Chapter 13 bankruptcy. The general rule regarding student loans is that they are not dischargeable unless the individual can prove that paying the loans would create “undue hardship.” Undue hardship is a difficult standard to prove as it is indeed a vague concept. I would typically tell my clients that undue hardship exists when a person has zero ability to earn any income. As a result, there is a low chance at discharging student loans for most bankruptcy filers. This situation creates a vicious cycle for many recent graduates who have entered the uncertain job market of the last few years.

A recent case from the United States Ninth Circuit Court of Appeal, Hedlund v. The Educational Resources Institute, reminds us that there are still some situations where a person can get the debts discharged through bankruptcy.

The debtor in this case, Michael Hedlund, obtained student loans on his undergraduate and law school degrees. Mr. Hedlund received a business degree from the University of Oregon and a law degree from Willamette Law School. He failed the bar exam and took a job earning approximately $10.00 an hour. After requesting hardship forbearances and loan consolidations Mr. Hedlund wound up defaulting on the loans. He was not able to implement any successful attempt at a modified repayment plan although he made several payments from various bank accounts when he could. The student loan creditors eventually began to garnish his wages.

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As tax day approaches many of my clients often ask if they can discharge tax debt when filing Chapter 7 or Chapter 13 bankruptcy. The short answer to the question is: maybe. It is safe for an individual to presume that his or her tax debts will probably not be dischargeable in bankruptcy as a general rule. However, there are certain situations when the tax debt can be discharged through the bankruptcy process. An individual can eliminate his or her tax debt if and only if that person satisfies all of the following five rules:

(1) The due date for filing the tax specific year must be at least 3 years old.

(2) The return must have been filed at least two years before the filing of the bankruptcy petition.

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As tax season approaches, many Sacramento area residents look forward to getting their refund checks over the upcoming weeks. Whether filing for Chapter 7 or Chapter 13, however, local residents must keep in mind that any income received is taken into account when qualifying for bankruptcy.

Few people realize that by receiving a significant tax refund they may no longer qualify for the bankruptcy. In order to qualify for Chapter 7 the individual must pass one of 2 income requirements. The first is the median income test. This means in order to qualify for Chapter 7 a person must earn less than the “average household income” for the same family size in his or her geographic region for the 6 months before the month in which they file the bankruptcy. The tax refund comes into play in this case because the median income test must account for all sources of income in the time period. Thus, if a person receives a significant tax refund they may no longer satisfy the median income test.

The second way to qualify for Chapter 7 bankruptcy is under the means test. The means test is a complex equation and comparison of a person’s debt to income ratio. In this test a person who makes more than the average income for his geographic region may still qualify for the bankruptcy provided their debts and monthly expenses rise to a significant portion of their income. Again, the receipt of a significant tax refund could effect the numbers enough so that the individual does not qualify under the means test either.

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Focusing my practice on Chapter 7 and Chapter 13 Bankruptcy in the Sacramento metropolitan area I take notice of headlines that might interest individuals considering filing for bankruptcy in the region.

Most of us are familiar with the controversy surrounding the Maloof’s proposed sale of the Sacramento Kings to a Seattle based investment group.

Well, it seems this melodrama has taken a turn for the more interesting to say the least. According to bankruptcy trustee David Flemmer, bankruptcy law could be what ultimately keeps the Kings in Sacramento. Although the Maloof’s own a controlling stake in the Sacramento Kings, they do not own the entire team. Their relationship with the minority shareholders could wind up killing the entire deal.

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As a Sacramento Bankruptcy Attorney I pay close attention to cases that affect residents living within the Sacramento metropolitan area. In a recent case heard by the Ninth U.S. Circuit Court of Appeals Bankruptcy Appellate Panel – In re Cha and Park – failing to pay ones rent, if determined to be an act of fraud, can be non-dischargeable in bankruptcy. This means a person attempting to eliminate this type of debt would be forced to repay the debt despite having filed the bankruptcy.

One of the exceptions to receiving a discharge in bankruptcy is when an individual incurs a debt while having no intention to repay that debt. The law sees this type of transaction as fraud. Incurring debt through fraud is a bar to having that debt wiped clean through bankruptcy. The best example of this situation is where a person who knows he will be filing for bankruptcy decides to go on a shopping spree and make thousands of dollars in purchases on his credit card knowing that the debts will be wiped clean in the bankruptcy. Sometimes these types of purchases are unintentional and the creditor has the burden to prove that the individual had no intention of repaying that debt.

In the case of Cha and Park, the debtors entered into a lease in 2008. During these negotiations, the debtors made assertions to the landlord that they made $14,000 a month and had $50,000 in the bank. The landlord presumably relied on these statements when making the decision to offer a lease to the debtors. Upon signing the lease the debtors only paid one month’s rent. By the time the landlord evicted the debtors they owed him over $46,000 in back rent. The landlord obtained a judgment against the debtors for the back rent in state court. The debtor’s promptly filed for bankruptcy and attempted to discharge the $46,000 judgment for back rent. The landlord then sued the debtors in the bankruptcy court saying that the debtors had engaged in fraud in that they never had any intention to pay the rent from the first place. Specifically, the landlord argued that the debtors lied with regard to the income and savings they disclosed and he relied on those false statements when making his decision to enter into the lease with them.

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As a Sacramento Bankruptcy Attorney I must often explain to my clients that domestic support obligations, such as spousal support and child support, are not dischargeable in Chapter 7 bankruptcy. This concept frustrates many individuals trying to clean up his or her economic profile. I must also remind these individuals to keep in mind that child and spousal support are not the only domestic support obligations to come out of a family court that could survive the bankruptcy. A recent case stemming from the New Hampshire Supreme Court, In re Mason, demonstrates a perfect example of a non-dischargeable domestic support obligation.

Mrs. Mason filed for bankruptcy in 2010 after having received a divorce from the state of New Hampshire in 2007. The parties’ divorce decree held that both parties would be liable to pay one half of their 2006 tax burden. However, Mrs. Mason listed Mr. Mason as a co-debtor on their tax lien and a creditor in her Chapter 7 petition and attempted to discharge her half of the parties’ 2006 income tax bill. Ms. Mason received her automatic discharge in the Chapter 7. Each party later attempted to assert relief from the 2006 taxes under the “innocent spouse” doctrine. The IRS granted Mrs. Mason’s request and denied the request of Mr. Mason. Mr. Mason moved to hold Ms. Mason in contempt of the family court for not paying her share of the tax bill and for an order directing her to pay one half of the tax bill. The circuit court denied Mr. Mason’s request. They found that since the IRS had granted her petition for relief under the “innocent spouse” doctrine, that it changed the nature of the taxes from a debt to the IRS to a personal debt to Mr. Martin and since Mr. Mason failed to fight the discharge in bankruptcy court that he would lose. They also denied his request for attorney’s fees.

On appeal, the New Hampshire Supreme Court reversed the lower court and held that the modifications of the bankruptcy code in 2005 mean that the domestic support obligations are not discharged automatically. The question turned on whether the taxes were automatically non-dischargeable because they were a part of the divorce decree, such as child support, or whether Mr. Martin would have to fight the discharge in the bankruptcy court. In their decision, the New Hampshire Supreme Court compared the modified bankruptcy code with the older version. They found that the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA “) removed the previous ability to pay tests that the law previously required regarding the dischargeability of a debt. This courts interpretation of the law found the BAPCPA directs that any debts falling within particular categories are automatically non-dischargeable. Specifically, they held that a debt created by a divorce decree is one of the automatically non-dischargeable debts. Since the 2007 divorce decree required Mrs. Mason to pay one half of the 2006 tax bill the court found that her debt was automatically non-dischargeable and she lost.

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Sacramento Mayor Kevin Johnson released his endorsement for local attorney Matthew D. Roy for the Sacramento City Charter Commission.

The Charter Commission will be charged with reviewing the Sacramento City Charter and determining if revisions are needed. If revisions are proposed by the Commission, such revisions will be in the form of a ballot question(s) that will be presented to the voters at a future primary or general municipal election. The Commission will serve a term of two (2) years and then disband. It is anticipated that the Commission will meet two (2) times per month, or on whatever schedule is deemed appropriate by the Commission to ensure that decisions are made in time for placement of questions on a future primary or general election ballot. This is an unpaid position.

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All Sacramento area residents have been hit hard by the economic downturn of the last several years. Unfortunately, this downturn has begun to disproportionately affect senior citizens and people leaving the workforce. In the early 90’s people over 55 accounted for approximately 2 percent of bankruptcy filings. Today, seniors account for roughly 22 percent of all bankruptcy filings.

The main reason seniors have been subject to Chapter 7 and Chapter 13 in recent years is due to the rising costs of medical care and their reliance on expensive medications. According to a recent study, 70 percent of seniors who live in poverty have suffered from a major medical condition. Only 50 percent of seniors living above the poverty line have faced these maladies that range from cancer, heart disease, high blood pressure, etc . to name a few.

Seniors therefore face a unique set of challenges when confronting economic turbulence. This is due, in large part, to the fact that elderly people tend to have limited incomes and there exists a lower probability of increasing income or earning additional income from employment opportunities as the individual continues to age. These real limitations have a direct impact on the individual’s decision of whether to file a Chapter 13 or a Chapter 7 bankruptcy.

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Attorney Matthew D. Roy has decided to run for a local position within the City of Sacramento in the upcoming November election. Matthew Roy started the Law Offices of Matthew D. Roy in 2010 that resolves personal and financial problems for Sacramento area residents.

Mr. Roy is a graduate of California State University Sacramento and the McGeorge school of law. As a volunteer attorney with W.E.A.V.E he has helped numerous victims of domestic violence obtain restraining orders against their abusers. Additionally, he regularly facilitates workshops at the William R. Ridgeway Family Relations Courthouse on behalf of the Family Law Facilitator’s Office to conduct their domestic violence prevention series.

Mr. Roy supports growth in Sacramento. He believes the City Charter should be updated since it was first established in 1920. “We are not a small town anymore,” says Roy. “We need to allow this city to evolve and grow with the modern times.” “By updating the Charter we will allow our city officials to meet the present needs of the city and prepare for the future.”

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As a Chapter 7 and Chapter 13 bankruptcy attorney in Sacramento I frequently receive calls from people who consider bankruptcy because they have oppressive student loan debt. Student loans are a major issue for many bankruptcy filers. I predict these issues will continue to increase and the laws will ultimately need revision as the problems surmount; students, have been denied the opportunity to discharge their debt even when the amounts are astronomical and the student has little means to make payments.

In what can be considered a victory for individuals with student loans, the Sixth U.S. Circuit Court of Appeals decided in In re Gourlay that Sallie Mae, the student loan organization, could not set a default judgment aside that had been obtained by debtor Kristin Gourlay. Sallie Mae failed to respond to adversary proceeding filed by Gourlay which attempted to find the debt dischargeable. The Sixth Circuit found that the bankruptcy court was within its rights to find that the failure was not excusable neglect, the court said; service was proper and the appropriate person simply failed to respond.

Kristin Gourlay filed for Chapter 7. During the case she filed an adversary proceeding seeking to determine the dischargeability of her student loans owed to Sallie Mae. She owed Sallie Mae approximately $25,500. Her bankruptcy attorney sent Sallie Mae a timely summons by certified mail, and the return card was signed by someone believed to be a part time employee at the company’s Virginia headquarters. The deadline for a response came and went without a response from Sallie Mae. Gourlay filed for a default judgment about a week later. The Bankruptcy Court intitially rejected her motion due to improper service. However, Gourlay served the summons again. When there was still no response, the bankruptcy court granted her second motion for default judgment. Eighteen days after the default judgment became final, Sallie Mae moved to set it aside for excusable neglect. The Bankruptcy Court ultimately rejected this, finding that internal breakdowns are not excusable neglect, and Sallie Mae appealed.

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