Archive for the ‘Bankruptcy Questions’ Category
Friday, February 18th, 2011
Many small businesses are struggling in a bad economy, and often a business owner will ask me if bankruptcy will help them save their business. Most of these people are looking for a way to restructure debt and get some breathing room from their creditors so they can rebuild their operations. Bankruptcy law provides for restructuring a business through a Chapter 11 bankruptcy
Chapter 11 bankruptcy procedures are designed for all businesses, from the small mom-and-pop up to large public corporations. Small business have to go through the same Chapter 11 procedures and hearings as do the largest companies like GM , Delta Airlines etc. Chapter 11 bankruptcy is complicated and very expensive compared to the consumer bankruptcy chapters 7 and 13.
Most small businesses already in financial trouble cannot afford to file Chapter 11. The initial legal retainer fee usually ranges from $20,000 and up. I recently read a good blog post on Scott Riddle’s Georgia Bankruptcy Law Blog which explains in detail why Chapter 11 bankruptcy is so expensive. Scott lists many of the Chapter 11 requirements and points out that, “The items listed above are required in every Chapter 11 case, whether it is a single asset real estate entity or a large manufacturing company.”
I find that most small businesses which are losing money end up closing their business and starting over after the business owner files a personal bankruptcy to deal with his personal guarantees of business debt.
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Friday, January 7th, 2011
Man lives in Idaho with his wife. Man borrows money. He can’t pay back the money. He and his wife move to Florida where they buy a house and open a joint bank account. The man files Chapter 7 bankruptcy. Is the bank account exempt as tenant’s by entireties property?
The general rule in Florida is that bank accounts owned jointly by the bankruptcy debtor and his non-filing spouse are exempt as tenants by entireties property. The above fact situation is complicated by the fact that Idaho is a community property state. In most community property states the law provides for co-equal management of community assets and that when either spouse incurs a debt for the benefit of the marital community the creditor may seek satisfaction of his unpaid debt from all community property; the rule is the opposite of our tenancy by entireties concept of marital property.
Under Florida’s tenancy by entireties rule the couple’s joint property is not protected from debts incurred by the two spouses jointly. In the Idaho example a creditor could argue that because the man incurred the debt in a community property state that debt is a joint debt which could be satisfied from jointly owned entireties property in Florida.
I have little experience with community property issues. My understanding is that there is no concept of “community debt” such that a debt incurred by one spouse obligates repayment by the other spouse and makes the debt a “joint debt.” I understand that community property refers to the assets from which a creditor can recover a debt by either spouse for the benefit of the marriage, but that it does not make all debts in the marriage joint debts. If my understanding of community property is correct then the Idaho debtor can protect bank accounts and other Florida assets owned jointly with his non-debtor spouse.
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Sunday, November 28th, 2010
A man consulted with me about filing Chapter 7 bankruptcy. The client and his non-debtor spouse lived on their sailboat docketed at the marina. The boat’s motor was broken but the sails worked. The boat was registered on a national boat registry with a federal boat ownership certificate. The ownership was listed as: husband wife. Not husband and wife, not husband or wife, and there was not choice of specifying ownership as tenants by entireties, tenants in common, or even as joint tenants with rights of survivorship. The client wanted to know if his boat was exempt from creditors under Florida law.
There are two possible exempts applicable to this boat: homestead and tenancy by entireties. A boat can be a homestead so long as the boat is permanently docket and is not suitable for transportation. A seaworthy boat is more like a “boat” than a “home.” This client’s boat could sail. However, the client explained that the boat could not reach open water without navigating though the docks and other docked boats which it could only do with a working motor. The client stated his boat could not sail away from its docket location without a motor.
In my opinion, this sailboat is currently not seaworthy. The client is using the boat more as a “home” than as transportation. I think this boat would be exempt homestead. However, if the boat’s motor is easily repairable a court could find that the asset is primarily a “boat” which is only temporarily immobile.
Even if this sail boat is not considered this debtor’s homestead, the boat would still be exempt from the husband’s creditors if it is titled as tenant by entireties. Under Florida law assets owned by a husband and wife as joint tenants with survivorship are presumed to be owned as tenants by entireties. The boat title is not clear on its face. Simply listing the names of the husband and wife gives no indication of whether they own the boat with rights of survivorship.
If the boat’s title instrument was a Florida state document, similar to a car title, I think most courts would not find entireties ownership. There are Florida court cases which require that state boat or car titles list the married owners specifically as tenants by entireties or as husband and wife in order to claim an entireties exemption. I do not think the same Florida court decisions regarding cars or boats registered with a Florida title would apply to this client’s boat with a national registry. In this instance, the owners’ intent is unclear on the face of the document, and absent court decisions interpreting entireties requirements for such federal title certificates I think the general presumption favoring tenants by entireties ownership of jointly titled assets would apply.
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Sunday, November 28th, 2010
A man consulted with me about filing Chapter 7 bankruptcy. The client and his non-debtor spouse lived on their sailboat docketed at the marina. The boat’s motor was broken but the sails worked. The boat was registered on a national boat registry with a federal boat ownership certificate. The ownership was listed as: husband wife. Not husband and wife, not husband or wife, and there was not choice of specifying ownership as tenants by entireties, tenants in common, or even as joint tenants with rights of survivorship. The client wanted to know if his boat was exempt from creditors under Florida law.
There are two possible exempts applicable to this boat: homestead and tenancy by entireties. A boat can be a homestead so long as the boat is permanently docket and is not suitable for transportation. A seaworthy boat is more like a “boat” than a “home.” This client’s boat could sail. However, the client explained that the boat could not reach open water without navigating though the docks and other docked boats which it could only do with a working motor. The client stated his boat could not sail away from its docket location without a motor.
In my opinion, this sailboat is currently not seaworthy. The client is using the boat more as a “home” than as transportation. I think this boat would be exempt homestead. However, if the boat’s motor is easily repairable a court could find that the asset is primarily a “boat” which is only temporarily immobile.
Even if this sail boat is not considered this debtor’s homestead, the boat would still be exempt from the husband’s creditors if it is titled as tenant by entireties. Under Florida law assets owned by a husband and wife as joint tenants with survivorship are presumed to be owned as tenants by entireties. The boat title is not clear on its face. Simply listing the names of the husband and wife gives no indication of whether they own the boat with rights of survivorship.
If the boat’s title instrument was a Florida state document, similar to a car title, I think most courts would not find entireties ownership. There are Florida court cases which require that state boat or car titles list the married owners specifically as tenants by entireties or as husband and wife in order to claim an entireties exemption. I do not think the same Florida court decisions regarding cars or boats registered with a Florida title would apply to this client’s boat with a national registry. In this instance, the owners’ intent is unclear on the face of the document, and absent court decisions interpreting entireties requirements for such federal title certificates I think the general presumption favoring tenants by entireties ownership of jointly titled assets would apply.
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Monday, October 18th, 2010
Five years ago one of my clients bought a new home pre-construction while he lived in his then current Florida homestead. The builder told him the new home would take 18 months to build. The builder finished early, in 12 months, and wrote my client a letter saying the home was soon complete and that under the construction contract he must purchase the new home in 30 days. The client had not yet put the existing home on the market (in the old days, it took only a month or two to sell a house). So, the client closed on the new home, then put the old home on the market. Three months after moving he sold the old home. He used all the sales proceeds to reduce the principal balance of the new mortgage on the new house. Now, he wants to file Chapter 7 bankruptcy and asks whether transferring the sales proceeds to the new house is a fraudulent transfer.
When the debtor moved to the new home he moved his homestead. The hold home ceased to be an exempt homestead property when the debtor moved in to the newer home as his principal residence. The use of sales proceeds to pay down the homestead mortgage was a conversion of non-exempt money to an exempt asset. The transfer cannot be attacked under Florida fraudulent transfer statutes because it occurred five years ago, beyond the statute of limitations. However, conversion of money to a homestead property within 10 years of filing bankruptcy may be avoided under bankruptcy law if the debtor intended to pay down his mortgage to avoid creditor claims.
Even though this occurred within the 10 year bankruptcy window, I do not think what this debtor did with his old house could reasonably be undone as a fraudulent conversion. The conversion of money into a homestead is reversible only if the debtor had actual intent to defraud creditors. This transaction does not appear to be a plan to defraud creditors or a bankruptcy trustee. This transaction looks like a normal person moving into a new home in a normal manner. Obviously, this debtor intended to sell his old home and use the money to buy a new home. Only because the home was ready unexpectedly early did the debtor have to move first and sell second.
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Friday, September 10th, 2010
Persons considering Chapter 7 bankruptcy must qualify for Chapter 7 under the “means test.” The means tests evaluates your disposable income after expenses. This week a caller asked me if a self-employed person could successfully manipulate income for purposes of the means test. After I explained median income and the means test, this caller stated that he could make his income whatever it needed to be for purposes of filing bankruptcy.
The caller was self employed. If a self employed person wants to file Chapter 7 bankruptcy the means test considers the amount of income the self employed person was paid from his business during the prior six months including salary and profit distributions. The means test does not look at the business’s gross income or business expenses.
The caller proposed that he could retain money in the business rather than pay it to himself as profit distributions in order to lower his personal income prior to filing bankruptcy. He wanted to know if his plan would work.
Business profits not distributed to the owner would increase the business’s cash deposits and the business value. If the business ends up with equity because of retained cash the Chapter 7 trustee could claim the business’s net equity as part of the owner’s bankruptcy estate. However, in most cases where self employed business owners consider Chapter 7 the business’s debt is greater than business assets. Retaining extra cash inside the business usually does not make the business solvent nor create equity in the owner’s interest.
There arguments a trustee or creditor could make to counter this type of pre-bankruptcy planning. For example, a creditor may argue that the debtor is “fraudulently transferring” money he is entitled to receive back into the business, or that the debtor is using the business as an “alter ego” to hold his personal salary and profits. These are academic arguments which I believe would not be pursued except in an egregious case. In practice, some self employed business owners probably can manipulate personal income within the scope of legitimate pre-bankruptcy planning in order to pass the means test.
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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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