Archive for the ‘Bankruptcy Questions’ Category
Wednesday, August 25th, 2010
Homestead protection in bankruptcy gets complicated when there are non-resident co-owners of the debtor’s homestead. An example is when parents help an adult child buy a home and insist on placing their names as co-owners of their child’s house.
A caller from south Florida asked me how a Chapter 7 bankruptcy would affect his homestead owned jointly with his parents free and clear. His parents purchased a house in Florida for their son. The house was titled jointly in the names of the son, who lives there, and the two parents. All three family members have credit card problems and are considering bankruptcy. The son asked me whether his Chapter 7 bankruptcy would affect is parents’ interest in his house. The house qualifies for unlimited homestead protection under the bankruptcy rules.
If the son files Chapter 7 only the son’s partial interest in the house is at issue. The Chapter 7 trustee has no interest or rights relating to what the parents own including the parents’ interest in the house (if any). The son’s ownership of the house would be exempt as homestead because the house is his primary residence.
The result is more complicated if the parents file Chapter 7. The parents’ Chapter 7 trustee may have a claim against the parents’ interest in their son’s house because the parents do not reside in the home as their own homestead.. The trustee could not force the sale of the home as long as the son resided there. The trustee could place a lien on the parents 2/3 interest which would be payable upon the sale or refinance, and the trustee could sell the lien on proceeds to an investor or to the debtor himself.
The parents could argue in their bankruptcy that they have no equitable interest in the house subject to their bankruptcy estate because they intended to transfer all beneficial interest in the house to their son. This position may be viable if the son has been paying all taxes, mortgage payments, and other expenses and if the son exclusively uses the property. The parents’ filing of a gift tax return or other written evidence of their intent to gift the property to their son would substantiate this position. It is possible for the parents to have part of the bare legal title without them having any equity interest subject to their own bankruptcy trustee, but that position depends on the facts.
This is another example of why parents should not jointly own assets with their children for estate planning or any other reason.
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Wednesday, August 18th, 2010
Chapter 13 bankruptcy is being used increasingly to modify first and second mortgages on primary residences. Chapter 13 permits debtors to strip off a second mortgage on an upside down property, and a new mortgage mediation program in the Orlando bankruptcy court gives debtors the opportunity to mediate a mortgage modification soon after they file a Chapter 13 bankruptcy. Keep in mind that a Chapter 13 debtor has the option to at any time convert a Chapter 13 to a Chapter 7 liquidation at any time (with minor restrictions).
I received a question by email which I want to address because I suspect other people have the same idea. The question is whether a debtor can with an upside down first mortgage, a second mortgage, and credit card debts can solve all his problems by filing a Chapter 13 bankruptcy, asking immediately for first mortgage mediation, modifying the first mortgage in the mediation, file a motion to strip the second mortgage completely, and then convert the case to a Chapter 7 to wipe out the credit card debts. This plan would be a dream bankruptcy leaving the debtor with a reduced first mortgage payment, no second mortgage, and no credit card debt.
It seems too good to be true, and it is. The problem is that Chapter 13 bankruptcy does not strip a second mortgage unless and until the bankruptcy plan is completed. If a debtor modified his home mortgage in mediation and then converted to a Chapter 7 the second mortgage would remain on the home because the debtor would not have received his Chapter 13 discharge at the end of the Chapter 13 plan. I think a debtor could convert to Chapter 7 after the mortgage modification of the first and/or second mortgage and retain the modified payments because the modification is not part of the bankruptcy proceeding. In other words, this plan may work to modify mortgages and then discharge unsecured debts, but it won’t work to stip a second mortgage in Chapter 13.
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Monday, July 19th, 2010
One of the major concerns of bankruptcy debtors is their credit rating. Credit ratings, while important to all, are especially important to bankruptcy debtors who usually emerge from bankruptcy with little cash and no assets. They need to reestablish credit as soon as possible in the event they need to buy necessities like a car or appliances for which they cannot pay cash.
I saw a good blog post by Michigan bankruptcy attorney Kurt O’Keefe about what steps people can take to rebuild credit after a bankruptcy. Those readers concerned about credit rehabilitation after bankruptcy can get good advice by reading Mr. O’Keefe’s article.
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Thursday, July 15th, 2010
It happened again- a parent puts their home in their child’s name, and then later a judgment against the child exposes the parent’s home to the child’s creditors. In this instance, a caller stated that his elderly parents living in Miami had transferred their free-and-clear homestead to the names of their three children. The home was transferred because the parents were afraid one of them would go into an nursing home and that the home would be lost to pay nursing home bills. That never happened- the father died and one of the daughters is living in the home taking care of their mother. The land is titled jointly among the surviving mother, the caller(son) and two sisters. The caller is facing a judgment in New York state. He asked me whether the judgment creditor can force the sale of his parents’ home and whether a bankruptcy trustee would assert a claim against the property if he had to file chapter 7 bankruptcy to wipe out the New York judgment.
Courts have held in most cases that when a parent adds his child’s name to the parent’s property or bank accounts for estate planning purposes the asset’s equitable ownership remains with the parent and the child hold bare legal title. In other words, the asset still belongs to the parent. However, this type of over-simplified estate planning creates a legal mess.
In this instance, if the creditor records a judgement in Florida the judgment will attach to the caller’s interest in the property. The family would have to go to court and hope the judge would understand the facts and the law and would free up the property from the caller’s creditors. If the caller files bankruptcy he could resolve the issue more quickly; he does not have to wait until a judgement shows up on the property record, and most favorable decisions protecting the father’s interest have been issued by bankruptcy courts. Or, the caller could deed his interest back to his mother. He would have to defend the transfer if challenged as a fraudulent conveyance.
There is no perfect answer; the best answer is not to have made the conveyance in the first place. My initial opinion would be for the mother to request the caller and the other children to deed back his property interests to the surviving mother. Although there may be fraudulent transfer issues against the current creditor, or in bankruptcy, this solution is consistent with ownership reality and probably could be defended.
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Tuesday, June 15th, 2010
Debtors get only a one thousand dollar exemption for cars. This exemption does not go very far when the vehicle in question is a work truck. This past week one of my clients presented to following fact situation. The debtor needed a truck for his business. He found that he could get better financing if he purchased the truck in his personal name rather than the business name. The truck was used exclusively for business. He purchased the truck for all cash with a check from the business’s checking account. He insured the truck with a commercial insurance policy paid by the business, and he depreciated the truck on the business’s income tax return. He wants to know if a Chapter 7 trustee will take his truck.
Anytime a bankruptcy debtor has a vehicle titled in his personal name its going to be an issue. I think the debtor has to list the truck under his personal property list on his bankruptcy schedules. If the debtor does not list the truck on his Schedule B because he believes it is the business’s vehicles, and the trustee finds out about the truck by checking public records, it will look like the debtor was trying to hide an asset. One option is to list the debtor and the business as owners to put the trustee on notice that the business has an interest in the truck.
Once all the facts are made known, I think this truck is not the debtor’s property. In my opinion, the debtor holds legal title for the benefit of the business. The debtor told me that he paid no personal money to the purchase or maintenance of this truck. Although vehicles titled in the debtor’s name are presumed to be the debtor’s property, this presumption can be overcome by facts which show that the debtor is holding legal title for the benefit of another party, or entity, and that the debtor and other party treat the vehicle as property of the other party.
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Thursday, May 20th, 2010
Husband and wife were just divorced, but until they can afford two households they remain living in the same house. They agreed that they would separate their finances. Each spouse pays their own expenses from their own income; they each pay ½ of the mortgage and other property expenses. The wife wants to file bankruptcy before she finds her own residence. She asked me if her bankruptcy analysis needs in include her ex-husband’s income if they are already financially separated and legally divorced.
I understand the rule is that a debtor’s means test includes all income in the household regardless of the relationship of those living in the house, and that therefore, the wife’s household income would include her ex-husband’s earnings. This might appear unfair if the ex-husband’s income is substantially higher than the wife’s earnings and they will be living separately in the future. The wife may deduct from her means test whatever the ex-husband pays toward household expenses. If the ex-husband pays expenses proportionate to his income then the means test result should be reasonably fair for the wife. If the couples respective incomes and actual expense responsibility cause the wife to fail the means test she should wait until she relocates in to her own household before she files bankruptcy.
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Monday, April 26th, 2010
A client established several years ago a bank account to save for his children’s education. The bank opened the account as a Totten Trust. The client said he knew his kids’ account was protected from judgment creditors because I had stated, somewhere on my website, that bank accounts established for children is exempt from creditors and not part of a Chapter 7 bankruptcy estate. I responded that regardless of what he read the proper way to protect children’s money from your creditors is by setting up a bank account under the Uniform Gift to Minors Act (UTMA) rather than a Totten Trust.
A "Totten Trust" is a common law concept that refers to a financial account with money held in trust for another person. Some banks will open accounts for the benefit of other persons as Totten Trust. Florida law considers Totten Trusts to be revocable at will during the grantor’s lifetime. Because the grantor may rescind the trust and receive Totten Trust money, so can the grantor’s creditors capture same funds. Florida bankruptcy attorney Jordan Bublick posted a good explanation of Totten Trusts in his blog.
Uniform Gifts to Minors Act is explained in Florida Statute 710.11. A transfer of money to a UTMA account is irrevocable and is permanently vested in the minor children until the child has reached the age of 21 years. Because the grantor cannot reverse a transfer of money to a UTMA account and cannot access money in the account, neither can the grantor’s creditors or a bankruptcy trustee. How do you set up a UTMA account at your bank? You ask for it !
Totten Trust accounts and UTMA accounts both involve money intended for minor children. The two types of accounts have different bankruptcy consequences. Don’t confuse them.
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Thursday, April 15th, 2010
A reader submits the following question about homestead protection and foreclosure in a bankruptcy context.
A Florida resident files Chapter 7. His homestead (is situated upon) 2 acres, each legally described as 1 acre lots. House sits on one acre with attached acre free and clear. If a Ch7 has already been filed and the house will eventually be lost to foreclosure, can the "attached acre" be sold or kept outside of a bankruptcy given it is now protected by homestead.
I inferred that the lender’s mortgage is against only the acre where the home is built. The Chapter 7 bankruptcy does not disturb or impair the lender’s mortgage. If the debtor does not keep current the mortgage, or arrange a modification program with the lender, the mortgage lender will take back the secured lot. The Chapter 7 bankruptcy will not strip or modify the mortgage.
The debtor’s homestead exemption covers his residence and up to 160 acres of contiguous property. The contiguous property does not have to be under the same legal description as the lot where the debtor’s home is located. The contiguous 160 acres may be comprised of several different legally described real estate.
I see two ways to interpret the facts in the question. First, if the debtor files Chapter 7 bankruptcy prior to the foreclosure the debtor would declare both lots as exempt homestead in a Chapter 7 bankruptcy. After the bank forecloses upon and take back possession of the residential lot the property as a whole will no longer be the debtor’s homestead because the bank will have taken the house. The remaining lot will lose homestead status even if it was part of the bankruptcy homestead exemption. Assuming the prior bankruptcy discharges all creditors, there will be no creditors post-bankruptcy who could record a judgment lien upon the unoccupied, and now non-exempt, one acre parcel.
The question is more interesting if the foreclosure precedes the bankruptcy. If the foreclosure against the residence takes place before the bankruptcy the remaining unoccupied lot could not be claimed as exempt in subsequent bankruptcy for the reason stated above; to repeat- the unoccupied lot cannot be protected by a homestead exemption after a bank’s foreclosure sale deprives the debtor of residency in and ownership of the residential house. The unoccupied lot would no longer be contiguous to a homestead lot.
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Sunday, April 11th, 2010
Many bankruptcy clients have complicated lives, and sometimes, their real life stories create interesting bankruptcy law issues. One bankruptcy client asked me this week if she could protect a house under the homestead exemption; the house has a an unusual history. The debtor and her boyfriend lived together in the house six years ago.(House One) The boyfriend paid for and owned the house by himself. Six years ago, in 2004, she and her boyfriend decided to buy and move into a second home (House Two) which they owned jointly. They rented their former residence, House One, for income. In 2006, one of my client’s creditors obtained a judgment against her for $25,000.
In 2007, the couple decided to split up. The boyfriend agreed to convey the legal title to House One to my client, and she signed a quit claim deed to transfer to the boyfriend her interest in House Two. House One and House Two each had mortgages and the two properties had about the same amount of equity in 2007, approximately $50,000 equity each. Now, the client proposes to kick out the month-to-month tenant in House One and move back in. She wants to know if House One would be exempt in bankruptcy as her homestead and whether the homestead would be encumbered by the creditor’s $25,000 judgment in addition to the mortgage.
A judgement which is recorded before a debtor acquires and occupies a homestead attaches the property, and such lien is not avoided in in a subsequent Chapter 7 bankruptcy. If the creditor records its judgment when the property is already the debtor’s homestead then the judgment lien cannot be enforced against what is the debtor’s homestead property.
Although my client occupied House One six years ago, prior to the creditor’s $25,000 judgment she did not own the property nor have an equitable interest because she did not pay for the house. Even if she had owned House One, when she and her boyfriend moved into House Two and rented House One she would have abandoned the homestead protection. House One was not my client’s homestead when the creditor obtained its $25,000 judgment.
The creditor’s judgment against my client attached to House One when the boyfriend deeded the house to my client in 2007. The house was not my client’s homestead in 2007 because she did not occupy the house and still is not living there.
Moving into the house now as a homestead will not enable this client to avoid the lien in a Chapter 7 bankruptcy. Other than this previously recorded judgment lien, the house would be exempt from her other creditors if the she files Chapter 7 bankruptcy. In light of the housing market since 2007 I assume the property has less than the homestead value ceiling for properties acquired within 40 months of bankruptcy. There are no fraudulent transfer issues since the client conveyed an interest in House Two in exchange for title to House One.
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Thursday, March 11th, 2010
From time to time I am approached by a younger bankruptcy attorney who says that my bankruptcy blog has helped his new bankruptcy practice. Bankruptcy law is more difficult than when I handled my first case and new bankruptcy attorneys face more complexity and more competition than I did. I have read several articles by other bankruptcy attorneys about how to market a new bankruptcy practice. One I read recently, with good advice, was written by New York bankruptcy attorney Jay Fleischman. Jay has an excellent blog called the Legal Practice Pro which is dedicated to lawyer marketing in general and bankruptcy marketing in particular. If you are an attorney with a new bankruptcy practice you really should subscribe to his blog.
I have my own suggestion to add to the many helpful hints Jay has offered in several of his blog articles. When asked, I always advise younger attorneys to seek a relationship with a bankruptcy paralegal who works, or has worked, in an active bankruptcy practice. An experienced bankruptcy paralegal can help a new attorney with many practical aspects of petition preparation and dealing on a day-to-day basis with the bankruptcy court and bankruptcy trustees. Bankruptcy paralegal cannot help you during their regular work day, but they can (with their employer’s permission) assist new attorneys after work or on weekends.
I think an attorney will find it much easier to communicate with and receive practical bankruptcy guidance from a paralegal than from another bankruptcy attorney. Of course, it will cost you much less to pay for a paralegal’s help. Many bankruptcy paralegals and legal secretaries face economic challenges similar to your own clients, and they would appreciate some additional income.
I have encouraged my own paralegal, who has 10 years experience, to assist other attorneys on her own time. I want to help attorneys getting into the bankruptcy field. I find it much easier to offer my paralegal’s time than to commit my own time to assist other lawyers.
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