Bankruptcy Questions Answered

Debtor Titled Business’s Work Truck In Debtor’s Name For Financing: Will Debtor Lose Truck In Bankruptcy?

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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Divorced Couple Still Lives Together: Does Either Spouse Have To Count Ex-Spouse’s Income In Bankruptcy Means Test?

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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Totten Trust Or Gift-To-Minors Account: Which Is Exempt In Bankruptcy?

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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Interesting Question About Mortgage Foreclosure And Homestead Exemption

A reader submits the following question about homestead protection and foreclosure in a bankruptcy context.

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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Homestead Exemption In Chapter 7 Bankruptcy Does Not Avoid Pre-Existing Judgment Lien

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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How To Start A New Bankruptcy Law Practice: Helpful Hints

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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Debtors Think Their Plan Will Protect Tax Refunds From Chapter 7 Trustee

Tax refunds due on the date you file for Chapter 7 bankruptcy are part of your bankruptcy estate, and consequently, the trustee will make you turn over your tax refund. Refunds due for current and past year’s tax returns are at risk. I had a telephone consultation with a couple from south Florida who think they found a loophole in the collection of tax refunds in bankruptcy court. Their plan may work, but I do not think the plan is proper or honest.

These prospective debtors had not filed their 2008 or 2007 tax returns. The knew they would owe penalties. The reason they said their returns were not yet filed is that they were gathering documentation of substantial additional tax losses for both years. With the losses included, they were confident they would receive a substantial tax refund for both years notwithstanding late filing penalties. If they filed returns now, without documentation or amount of eligible losses, they would owe the IRS taxes and interest on top of the late filing penalties.

Here’s the plan they came up with. They said they were going to file the tax returns now without the expected losses. The returns would show significant tax liability. They had no money to pay these taxes, but they figured it would take the IRS months to review the 2007 and 2008 returns and to ask for payment. Even if the IRS asked them for the tax money they felt they could work out a payment plan with the IRS. After filing these tax returns, they would proceed to file Chapter 7 bankruptcy and file with the trustee their 2007 and 2008 returns showing taxes owed.

At some point after filing bankruptcy they would finally gather information about their tax losses for the same year. They felt it may take several months before they could capture all losses. At that point, they would file amended tax returns which would change a tax debt to a significant tax refund and wipe out all interest. By then, the bankruptcy would be discharged and closed.

This plan may work in practice. Debtors must file tax returns, but there is never, or rarely, a request for amended tax returns. Trustees almost never check for future amended tax returns that show greater tax refunds. The problem is that if debtors expect a future tax refund, even if delayed until amendments are filed, they are required to disclose their expectancy on their bankruptcy schedules. And, if a trustee asks these debtors (as they often do) if they expect any tax refunds the debtors would have to lie in order to hide their planned amended tax returns.

Like many debtor bankruptcy schemes, it may work if creditors don’t find out you lied.

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Forty Month Homestead Rule: Does It Count Time Of Occupancy Or Time Of Ownership?

There is less homestead protection in bankruptcy than under Florida law outside of bankruptcy court. Florida law provides immediate homestead protection without any limit on value. In bankruptcy, a debtor may protect only $137,000 of homestead value for the first 40 months. A client called me today because he was concerned about whether or not he passed the "40 months test" for homestead protection if he had to file bankruptcy. The client purchased a residence in Florida four years ago for $350,000 all cash. The client has been renting a home in Georgia during a temporary job assignment. He intends to return to the Florida house after the temporary assignment, or alternatively sell the Florida house and look for a new home when he gets back to the Florida home office.

The client said he read an online article written by another attorney that he interpreted to jeopardize his homestead exemption in a bankruptcy. The article stated that bankruptcy law requires 40 months of continuous occupancy in order to qualify for unlimited homestead protection in bankruptcy. The client thought his homestead protection would be limited to $137,000 because he has been temporarily living in Georgia.

What my client read, or thought he read, is not correct. The bankruptcy law does not require 40 months continuous occupancy for unlimited homestead protection; the Bankruptcy Code limits homestead exemptions in Florida to $137,000 if the debtor "acquired their home within the 1215 days before the filing." Courts interpreting the statute found that homestead exemption is based on the time of ownership and not time of occupancy.

Courts also have held that the time limit applies to acquisition of equity and not acquisition of legal title. If a debtor sells one homestead and rolls-over all the equity into a new homestead the clock does not reset because no additional equity was acquired. Paying down a mortgage during a 40 month time period does reset the clock because the debtor would have acquired new equity.

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Are Insurance Commission Residual Payments Exempt In Bankruptcy?

I was at bankruptcy court yesterday for some of my clients' creditor/trustee meetings. While waiting for my clients cases to be called I listened to a interesting case involving an insurance salesman. The insurance salesman (debtor) told the trustee that his commissions from current sales was declining, but that he had been living on residual commissions for prior year’s sales. The trustee told him that the residual income was not exempt and that the money must be turned over to the trustee. The debtor’s attorney disagreed because, he said, that the debtor was head of household and that commissions from the past sales represent the exempt earnings under the Florida statute that protects head of household income.

In my opinion this trustee is correct and that the debtor’s residual commissions are not exempt head of household commissions. The Florida statute exempts all earnings of a head of household including wages and commissions. Current commissions deposited in the debtor’s bank account within the last six months are exempt in bankruptcy. Bankruptcy courts have protected deferred compensation in some cases. Residual payments are different. The debtor’s right to insurance residuals is a contract right and is a form of account receivable. Residuals are due, not when the agent sells the policy because of current efforts but are due when the insured pays annual insurance premiums to maintain an existing policy. I have not researched the issue, but I suspect that a trustee can reach residual income due when an insured pays continuing insurance premiums.

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Rebuilding Your Credit Score After Bankruptcy

The more I speak with or read articles by other bankruptcy and asset protection attorneys the more I realize that our clients ask us all the same questions. One very common client concern is rebuilding credit after a bankruptcy. Credit is not a legal issue, and repairing credit scores is not within my professional expertise. I look to my clients experiences and writings by other experts to learn what I can about credit repair. I recently saw in interesting blog post on the subject by Texas bankruptcy attorney, Brian Fears, Practical Ideas for Rebuilding Your Credit Score After Bankruptcy .

One suggestion in Mr. Fears' article is making sure you promptly pay loans that survive bankruptcy such as student loans or reaffirmed secured debt. The debts Mr. Fears refers to must be paid. However, too often, my own clients want to reaffirm unsecured credit cards in order to help rebuild their credit score. This is usually a bad idea. I don't think its worth obligating yourself to pay those credit cards that can be wiped out in your bankruptcy case. Good credit scores are helpful; cash is even more helpful. I try to convince clients to minimize post bankruptcy obligations even if it means taking longer to prove credit worthiness. Mr. Fears correctly advices that you should build post-bankruptcy credit scores based only on those debts which cannot legally be discharged in bankruptcy.

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