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Consumer Bankruptcy

Non-Dischargeability of Foreign Student Loans

By: Andrew Brown

St. John’s Law Student

American Bankruptcy Institute Law Review Staffer

Educational loans made, insured, or guaranteed by a governmental unit are not dischargeable in a chapter 7 bankruptcy case, unless the debtor obtains a hardship determination.[1] Thus, it is very difficult to discharge student loans through a bankruptcy case. This is true even if the loan is made, insured, or guaranteed by a foreign governmental unit. In the case of In re Mulley, the Bankruptcy Court for the Central District of California determined that government guaranteed student loans, made pursuant to the Canada Student Loans Act (“CSLA"), were non-dischargeable under the United States Bankruptcy Code.[2]

The Eighth Circuit’s Leniency on Discharging Student Loan Debt

By: Maria Casamassa

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Under the Bankruptcy Code, a discharge of student loan debt is not justified “unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents . . . .”[1] A finding of undue hardship is difficult to establish; accordingly, student loan debt is rarely discharged.[2] However, in In re Fern,[3] the United States Bankruptcy Court for the Northern District of Iowa applied the totality of the circumstances test and held that the debtor presented sufficient evidence demonstrating that excepting her student loans from discharge would impose an undue hardship on her and her family and, therefore, the debt was dischargeable.[4]

A Debtor May Not Necessarily Have His Chapter 7 Case Dismissed

By: Shane Walsh

St. John’s Law Student

American Bankruptcy Institute Law Review

A person who files for bankruptcy may not simply change his mind and have his bankruptcy case dismissed. In In re Segal , the bankruptcy court denied a debtor’s request to dismiss his voluntary chapter 7 case because the debtor acted in bad faith, dismissal would prejudice his creditors, and the debtor would be unable to “secure a fresh start outside of bankruptcy.”[1] In this instance, the debtor filed a chapter 7 petition to avoid the imminent foreclosure sale of his apartment.[2] Four months after the chapter 7 petition was filed, the debtor filed a motion to dismiss arguing that the lack of his signature on the original petition was a “fatal defect to the filing.”[3] The court, however, denied the request, finding that the debtor filed the motion to dismiss after obtaining the benefit of the automatic stay to the detriment of his creditors.[4]

The Eighth Circuit Extends Substantive Consolidation by Affirming the Consolidation of a Separated Couple’s Bankruptcy Estates

By: Justin A. Klingenberg

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Boellner v. Dowden, the Eighth Circuit held that it is within the discretion of the bankruptcy court to order substantive consolidation of spouses’ bankruptcy estates when they file separate petitions for chapter 7 bankruptcy. In Boellner, the debtors, Samuel and Marilyn Boellner, who were married and living separately, each filed their own petition for chapter 7 bankruptcy on the same day. James Dowden was assigned as trustee in their respective cases. In addition to living apart and having individual credit card debt, the debtors “had separate insurance policies, separate interests in business, separate annuities, and separate IRAs….” However, the debtors shared a checking account, several credit cards, a leased car, and had jointly withdrawn funds from IRAs. Additionally, the debtors shared obligations for state and federal taxes and attorney’s fees from a previous civil case. The trustee filed a motion for joint administration and substantive consolidation, arguing that the debtors’ “assets, liabilities, and handling of financial affairs were substantially the same,” and permitting them to “maintain separate bankruptcy estates would prejudice the creditors.” The debtors disagreed and argued that they should be permitted to maintain separate bankruptcy estates because it would allow Samuel, the husband, to choose federal exemptions and Marilyn, the wife, to choose state exemptions. After comparing the schedules filed by each spouse, the bankruptcy court ruled in favor of the trustee, and ordered substantive consolidation. The debtors appealed to the Bankruptcy Appellate Panel and the trustee removed the appeal to the district court, which affirmed the bankruptcy court’s order. Subsequently, the debtors appealed to the Eighth Circuit, contending that the substantive consolidation order was an abuse of the bankruptcy court’s discretion. In determining whether substantive consolidation was appropriate, the Eighth Circuit adopted a two-prong factor test articulated by the Eleventh Circuit that considered “(1) whether there is a substantial identity between the assets, liabilities, and handling of financial affairs between the debtor spouses; and (2) whether harm will result from permitting or denying consolidation.” In assessing the first factor, the Eighth Circuit found that the bankruptcy court’s reliance on the debtor’s statements of financial affairs and bankruptcy schedules was appropriate. In concluding the first factor had been fulfilled and, thus, substantial identity had been established, the Eighth Circuit emphasized the bankruptcy court’s finding it peculiar that Marilyn claimed ownership of the home while Samuel claimed ownership of the household’s goods. In its analysis of the second factor, the Eight Circuit affirmed the bankruptcy court’s finding that the evidence was sufficient to establish harm to creditors, particularly because the debtor’s “separate estates would have significantly less value than if their cases were substantively consolidated and [they] were forced to choose either federal or state exemptions.” Ultimately, the Eighth Circuit held that, since substantial identity had been established and separate estates would greatly prejudice the debtor’s creditors, the bankruptcy court was within its discretion in ordering substantive consolidation.

The Ninth Circuit Continues to Broadly Interpret § 510 (b)

By: James M. Kerins

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Pensco Trust Co. v. Tristar Esperanza Props., LLC (In re Tristar Esperanza Props., LLC), the U.S. Court of Appeals for the Ninth Circuit held that a creditors claim, based upon a debtor’s failure to pay an arbitration award, must be subordinated pursuant to section 510 (b) of the Bankruptcy Code. In Tristar, Jane O'Donnell purchased a minority membership interest in Tristar, a limited liability company, and exercised her right to withdraw her membership interest. Subsequently, debtor filed a chapter 11 bankruptcy petition and commenced an adversary proceeding against O'Donnell seeking to subordinate her claims under section 510 (b) of the Bankruptcy Code. O'Donnell insisted that section 510 (b) of the Bankruptcy Code did not apply because the claim was “not for damages, but for a fixed, admitted debt.” Additionally, O'Donnell claimed that section 510 (b) should not apply because the claim “does not arise from the purchase or sale of securities” because she converted her equity interest to a debt claim before debtor filed its bankruptcy petition. The bankruptcy court rejected O'Donnell’s arguments and held that the subordination clause of section 510 (b) “sweeps broadly.” Consequently, the bankruptcy court “broadly interpreted” the phrase “arises from” to mandate subordination whenever there is a “causal relationship between the claim and the purchase” or sale of securities. Furthermore, although O'Donnell did not “enjoy the benefits of equity ownership on the date of the petition,” according to the bankruptcy court, since O'Donnell bargained for an equity position she therefore, “embraced the risks that position entails.” On appeal, the Bankruptcy Appellate Panel for the Ninth Circuit[xiii] and the United States Court of Appeals for the Ninth Circuit both affirmed.

Same-Sex Couple Deemed “Spouses” for Purposes of the Bankruptcy Code

By: Michael Rich

St John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In Re Matson, the court held that a same-sex couple who filed for bankruptcy as joint debtors were “spouses” for the purpose of the Bankruptcy Code even though the petition was filed in a state that did not recognize their same-sex marriage. In Matson, the debtors were legally married in Iowa but resided in Wisconsin, which does not recognize same-sex marriages. Upon the filing of the case, a creditor moved to dismiss the bankruptcy case or, in the alternative, to bifurcate the case. The creditor argued that a joint bankruptcy case could only be commenced “by an individual that may be a debtor under such chapters and such individual’s spouse.” Further, the creditor claimed that “the definition of marriage and the regulation of marriage . . . has been treated as being within the authority and realm of the separate States.” Thus, the creditor argued that since Wisconsin did not permit or recognize same sex marriages, the debtors should not be deemed “spouses” for the purpose of a joint bankruptcy petition. In the response, the debtors relied on the Supreme Court’s holding that the federal Defense of Marriage Act, which defined marriage as a union between one man and one women, was unconstitutional because it “violate[d] basic due process and equal protection principles applicable to the Federal Government.” In particular, the debtors argued that following Windsor, the definition of marriage could no longer be restricted to “a union between one man and one woman.” Therefore, the debtors claimed that Wisconsin did not have the authority to deny a lawfully wedded couple any federal benefits, which would include same-sex couples right to file as spouses in a joint bankruptcy case. Ultimately, the Matson court denied the creditor’s motion to dismiss or, in the alternative, bifurcate the case because the court found that it was required to give full faith and credit to the Iowa marriage.

A Self-Employed Chapter 13 Debtor Cannot Deduct Ordinary and Necessary Business Expenses When Calculating His Current Monthly Income

By: Arthur Rushforth

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re Hoffman, a bankruptcy court denied confirmation of the joint debtors’ plan after the chapter 13 trustee objected to the plan, which had a three-year applicable commitment period, holding that the debtors improperly deducted ordinary and necessary business expenses when calculating their current monthly income. Instead, the court held that the debtors should have used the gross receipts from the business. In Hoffman, a married couple filed a joint petition under chapter 13 of the Bankruptcy Code. The husband was self-employed, and pursuant to Official Bankruptcy Form 22C, the debtors deducted the husband’s ordinary and necessary business expenses from his gross receipts when they calculated their current monthly income. Based on these calculations the debtors’ annualized current monthly income was lower than the applicable median family income of in Minnesota, where they resided. Accordingly, the debtors proposed a plan that provided for them to pay $175.00 for thirty-six months. The chapter 13 trustee objected, arguing that the debtors improperly deducted business expenses when calculating the husband’s current monthly income and that the debtor’s current monthly income was above-median after eliminating that deduction, thereby triggering a five-year applicable commitment plan rather than the three-year period proposed by the debtors. In particular, the trustee argued the plain language of section 1325 did not provide for the deduction of ordinary and necessary business expenses when calculating current monthly income. The debtors responded by claiming their applicable commitment calculation conformed to the calculation scheme provided for by Official Form 22C. The court ultimately agreed with the trustee and denied the confirmation of the debtor’s plan.