Current Issues | Seattle Debt Law

Fighting Against Payday Lenders

When a debtor files for bankruptcy, the very first thing that happens is an automatic stay, which prevents creditors from attempting to collect from you while the bankruptcy process proceeds. Last year, an influential case, In re Meadows, came out of the Sixth Circuit Bankruptcy Appellate Panel saying that a payday lender can cash a post-dated check given to it by a debtor at the time of the loan, even after the debtor has filed bankruptcy. At Seattle Debt Law, we believe this decision is incorrect: cashing such a check should be considered a violation of the automatic stay. The court in that decision found that there was an exception to the automatic stay in a case where a creditor is “negotiating” (cashing) a check.

Our interest in the Meadows decision was piqued a few months ago when one of our Chapter 7 bankruptcy clients was the victim of a payday lender who took the money from her account over a month after we filed the bankruptcy case. We are currently fighting this in the bankruptcy court and hope that our judge will conclude that a post-dated check given in exchange for a payday loan is nothing more than collateral that cannot be seized during the automatic stay. Washington is not in the Sixth Circuit, so we’re hopeful that the judge will not be guided by the Meadows decision and will recognize that the action taken by the payday lender was unlawful. We will keep you up to date and informed on how the case turns out.

Why We Love the Means Test

In the Ninth Circuit, which includes Washington, a landmark case, Maney v. Kagenveama, 527 F.3d 990 (2008), has made Chapter 13 repayment plans quicker, cheaper, and easier in many cases.

Some background: BAPCPA, the 2005 bankruptcy law, instituted a means test that bankruptcy filers must take. The debtor’s income and expenses are calculated according to a complicated formula that includes certain allowances for necessary expenses like shelter and transportation. In the case of a Chapter 13 filer, the values yielded by the formula are used to create the bankruptcy plan, taking a great deal of discretion out of the hands of the judge. The means test calculates the debtor’s projected monthly income and expenses based on the average of her monthly income and expenses over the last six months.

In Kagenveama, the circuit court found that under the law, the debtor’s “disposable income” is defined as the figure generated by the means test, even if the debtor’s actual disposable income is greater (e.g., if the debtor spends less on a house and car than is assumed by the allowances in the formula). In the case of a high-income debtor, this is especially significant, because a debtor who has a negative net disposable income as calculated by the formula may submit a bankruptcy plan that completes in far less time than the 5 years ordinarily required by law—indeed, the debtor could conceivably receive a discharge immediately, and walk away owing nothing going forward, as with a Chapter 7.

Huh? No plan Length? no payments? How could this possibly be? Under the old laws, Chapter 13 plans typically went from 3 to 5 years in most cases, and were funded by subtracting the debtor’s actual expenses from actual income. They were actually based upon reality. Because the new law takes away the bankruptcy judge’s power to use common sense in favor of an algorithm, outcomes like this are possible for higher-income debtors. (Incidentally, this perk is not available to low-income Chapter 13 filers, who must spend 3 years in bankruptcy whether their calculated disposable income is positive or negative. Congress simply assumed a high-income debtor would never have negative disposable income as determined by their mighty formula, so they didn’t bother to account for it in the law.)

The ramifications of this ruling were made clear in a recent case in Tacoma, In re Smith, in which the debtors, a couple with negative calculated disposable income, voluntarily surrendered their house and car after completing the means test but before developing and submitting a bankruptcy plan with a six-month applicable commitment period. The bankruptcy judge, citing Kagenveama, reluctantly accepted the six-month plan as a good faith plan.

The Smith case is currently before the bankruptcy appellate panel, and it’s certain that there will be a lot more disagreements and appeals before all is said and done. For the time being, however, bankruptcy filers in Washington have a very powerful precedent on their side.

Education IRAs and Washington State Get Plans

In 2008 the Seattle bankruptcy courts defined the law concerning the exemption for 529 education plans. Under the tax code, contributions to the plan are a “completed gift” to the beneficiary. But a complication arises when the same law gives the account creator control over the account—including the ability to cash the account out early, subject to a penalty, and the ability to change the beneficiary.

When a bankruptcy is filed, all property of the debtor comes into the bankruptcy estate to be either liquidated for creditors or exempted for the debtor. In 2005, when Congress changed the bankruptcy law with BAPCPA, the drafters of the law decided to protect older contributions into the college savings account, and focus scrutiny on the newer contributions. Specifically, if a contribution was made more than two years ago, it does not become part of the bankruptcy estate, and under no circumstances can its proceeds become available to creditors. For contributions made more than a year ago but less than two years ago, only the first $5,000 contributed is kept out of the estate. Finally, any contributions made during the last year will be included in the estate. (The exclusions also depend on the beneficiary having specific familial relationships to the settlor and the contributions being within the allowed 529 limits.)

The stated intent of the cap on contributions for the two years preceding bankruptcy is to prevent a debtor from protecting too many funds from his creditors prior to the bankruptcy filing. At Seattle Debt Law, we have further defined this statute of the code to include $5000 per child for contributions made more than a year but less than two years before filing.