Archive for the ‘Bankruptcy Questions’ Category
Thursday, December 3rd, 2009
I think all bankruptcy attorneys encounter strange questions and fact situations in the lives of their bankrupt clients. Here’s one my secretary heard last week from a client who was completing our bankruptcy questionnaire. The client asked my secretary if he should include his deceased mother’s credit card. My secretary told him "no" because children are not liable for their parents’ debts. But, the client asked, what happens to all the debt he charged for his own benefit on his mother’s credit card after his mother died?
This guy hijacked his death mother’s credit card in order to pay his own living expenses. Leaving aside the moral issues, it is unclear whether he lists these charges on his bankruptcy petition. Legally, the debts are not yet his legal obligation. Its not his credit card. If his mother’s credit card companies ever figure out what happened they may sue the son for the money. At that point, the credit card companies will be creditors. The credit card lenders could sue the son on many counts including fraud. It may even be criminal fraud.
If the son lists the credit cards as contingent debts he is alerting these credit card companies of the problem and their potential cause of action against the son. Its not in the son’s best interest to list the debts on his bankruptcy petition. I’m not sure what a bankruptcy attorney (me, in this case) should advise or require the client to do in the bankruptcy. Putting these debts on the son’s petition is against the client’s interest. Filing the petition without the mother’s credit cards may further the client’s fraud. It may make a difference if the client is willing to reaffirm these post-death charges. The client has not disclosed his intentions, and I have not addressed the issues with him. If I send him to another attorney I assume the client will not disclose to the next bankruptcy attorney anything about the debt on the mother’s cards, and I cannot divulge this information to the next attorney or the credit card companies.
Its an interesting situation- some people just keep digging deeper holes for themselves.
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Tuesday, December 1st, 2009
An attorney emailed me with a question about a prospective bankruptcy client who is in the real estate sales business. The real estate salesman has a few contracts in the pipeline- sales contracts are signed subject to financing contingency and other conditions. If the sales close the realtor will earn a commissions. The question is whether the salesman has to value and report these future earnings on a Chapter 7 bankruptcy petition either as an asset or as income. The attorney wonders whether the debtor should discount the present value of the future commissions based on their probability and timing.
I think this question depends on the laws pertaining to real estate contracts and brokerage commissions. I consulted another attorney who specializes in real estate law. The real estate attorney explained that the answer depends upon certain unknown facts. If the debtor is a real estate salesman, not a broker, the salesman’s contractual relationship is with his broker. The real estate commission is payable to the broker pursuant to the contract. In that event, the commissions are not a contractual interest and are just possible future earnings that will be earned if an when the sales close. Many debtors have sales jobs, and they typically do not list commissions on deals they are working on before they commissions are earned. All sales people have possible future commissions at any point in time.
If the debtor is a broker the debtor may have a contractual interest in the sales contracts. However, many real estate contracts state that commissions will be due but do not state the amount. In such case, the broker does not have a definite financial right in the real estate contract. Some brokers are paid under an independent broker contact; some broker contracts state that the broker is entitled to some commission when a sales contract is signed in which case this debtor would list the amount as commission income.
There is a general legal principal that real estate commissions are not due and payable until the sales contract has no contingencies. Even after all contract legal conditions are satisfied either party can still breach the contract and no commission would be received (pending a suit for commission). Or, for example, a bank can withdraw a financing commitment. I think there is a valid argument that no commission is earned until the closing. In my own bankruptcy cases I typically do not include prospective commission income on any sale by any commissioned salesperson until closing is certain. I believe that all commissions are speculative until closing. As any sales professional will tell you there are too many things that can kill a deal until the money passes hands.
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Saturday, November 28th, 2009
Its a question all bankruptcy attorneys are asked by their clients- What can I do to stop these creditors from harrassing me? Creditor harrassment is not a bankruptcy issue. Everyone knows that after a debtor files for bankruptcy- Chapter 7 or 13- the court issues a Notice of Commencement to all creditors warning them that any further effort to collect a debt violates the automatic stay and subjects an offending creditor to sanctions. There are separate laws protecting all individuals against unfair collections. The main law is the Fair Debt Collection Practices Act.
A particularly annoying collection tactic I have heard from my clients is that of creditors leaving messages on the debtor's voice mail at home or at work. I read an interesting blog post on this topic by Georgia bankruptcy attorney Jonathan Ginsburg. FDCPA Does Not Give Debt Collector the Right to Leave Messages on Your Phone Answering Machine. Mr. Ginsburg discusses a decision by the 11th Circuit Court of Appeals which is the federal appeals court with jurisdiction over Georgia law.This court also controls Florida law so the cases he discusses is applicable to Florida debtors too.
If you believe you are a victim of an FDCPA collection violation you may list the claim on your bankruptcy petition. The trustee may decide to pursue the claim aginst the offending creditor. If you do not file bankruptcy you can consult with an attorney who works in the area of consumer protection law; some bankruptcy attorneys also litigate consumer protection complaints. Most bankruptcy attorneys do not prosecute FDCPA violations outside of bankruptcy court.
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Saturday, November 28th, 2009
Its a question all bankruptcy attorneys are asked by their clients- What can I do to stop these creditors from harassing me? Creditor harassment is not a bankruptcy issue. Everyone knows that after a debtor files for bankruptcy- Chapter 7 or 13- the court issues a Notice of Commencement to all creditors warning them that any further effort to collect a debt violates the automatic stay and subjects an offending creditor to sanctions. There are separate laws protecting all individuals against unfair collections. The main law is the Fair Debt Collection Practices Act.
A particularly annoying collection tactic I have heard from my clients is that of creditors leaving messages on the debtor's voice mail at home or at work. I read an interesting blog post on this topic by Georgia bankruptcy attorney Jonathan Ginsburg. FDCPA Does Not Give Debt Collector the Right to Leave Messages on Your Phone Answering Machine. Mr. Ginsburg discusses a decision by the 11th Circuit Court of Appeals which is the federal appeals court with jurisdiction over Georgia law.This court also controls Florida law so the cases he discusses is applicable to Florida debtors too.
If you believe you are a victim of an FDCPA collection violation you may list the claim on your bankruptcy petition. The trustee may decide to pursue the claim against the offending creditor. If you do not file bankruptcy you can consult with an attorney who works in the area of consumer protection law; some bankruptcy attorneys also litigate consumer protection complaints. Most bankruptcy attorneys do not prosecute FDCPA violations outside of bankruptcy court.
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Monday, November 23rd, 2009
I received an email from a bankruptcy attorney with an interesting question about debtors’ interests in limited liability companies. The debtor and his non-filing spouse started a new business using a limited liability company. The debtor and his spouse do not have any joint debt. Here’s the question:
"The LLC is a new company and has yet to generate money, it is a project the client is working on and listed his spouse as the owner since her credit is excellent. The client has made no money in the last 8 months so qualifying for the means test should be simple enough, but the LLC is what raises the issue. Is the client being on the operating agreement enough to allow the Bankruptcy trustee to come after the LLC?"
LLC membership interest provide asset protection outside of bankruptcy court. Most new small businesses are formed as limited liability companies rather than S-corporations to take advantage of the asset protection features as well as certain cost efficiencies. A creditor cannot levy upon a LLC membership interest. Florida statutes limit the creditor’s collection remedies to a lien on LLC distributions, if any. When a debtor files bankruptcy, however, the LLC provides much less protection. The bankruptcy trustee is not limited to a charging lien, and the trustee may seize as part of the bankruptcy estate a debtor’s LLC interest which is not otherwise exempt. (There may be some bankruptcy protection when the LLC is an executory contract). What will happen to the LLC interest owned by this debtor?
Nothing. The debtor will list his LLC interest at its current fair market value. The value of the debtor’s membership interest is not what he hopes the LLC will be worth in the future after years of his own hard work and a little luck, but the amount its worth today to an arms length buyer. Although the question does not reveal the nature of the LLC business I assume that without the debtor and his spouse investing their sweat equity the value of the LLC today is 0. The trustee is very unlikely to pursue an LLC interest with no present value to anyone but the debtor.
In addition, the debtor’s LLC interest may be exempt. The question as asked stated that the married couple owns the LLC together. I will assume that the two spouses own 100% of the LLC interest jointly. Florida law provides that all property, including intangible personal property such as an LLC interest, owned jointly by husband and wife is tenants by entireties property. T by E property is exempt in bankruptcy filed by one spouse where the two spouses have no joint unsecured debt. Because this debtor and his spouse have no joint debt the debtor’s interest in the jointly owned LLC interest is exempt as tenants by entireties. If each of these spouses owed a separate 50% of the membership interest the entireties exemption would not apply.
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Thursday, November 5th, 2009
I often get asked about the effect of filing bankruptcy on debtors' employment. I have sometimes been asked about bankruptcy's effect on a debtor's government security clearance. I found a really good blog post on the subject by California bankruptcy attorney Michael Doan.
Bankruptcy | Bankruptcy and security clearances | Bankruptcy Law Network.
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Sunday, October 25th, 2009
A lawyer called me with a question about a car lease in a Chapter 13 bankruptcy. His debtor filed Chapter 13 with a car lease that terminates in three years. His client’s bankruptcy plan is a five-year plan. Chapter 13 debtors cannot incur new debt (such as a new car loan or lease) without permission. The attorney and debtor are concerned that three years into the Chapter 13, at the end of the current car lease, the debtor be without a car. The attorney asked me if I knew of a way for a Chapter 13 plan to extend the term of an existing car lease.
The general rule is that Chapter 13 debtors can assume or reject leases and other contracts. This debtor will assume the car lease to keep the car for the balance of the lease term. Another general Chapter 13 rule is that debtors cannot modify the terms and conditions of existing contracts such as mortgages and leases. I don’t think this Chapter 13 debtor can extend the term of his car lease.
However, there is an easy solution. Three years into the bankruptcy plan the debtor can request permission from the Chapter 13 trustee to purchase a car when the car lease expires. The key will be to keep the debtor’s monthly payments for the next car at or below the amount of the debtor’s payments under the current lease. If the debtor does not increase his monthly car expenses the trustee will approve the purchase because the new car payment will not increase total monthly expenses and will not decrease the amount of money paid monthly to the debtor’s unsecured creditors under the bankruptcy plan. New car debt equal to or less than the current car payment does not negatively impact the debtor nor his creditors.
posted by Jonathan Alper, bankruptcy and asset protection lawyer, Orlando, Florida
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Thursday, October 22nd, 2009
Debtors are discovering that they can strip off their second mortgage lien on their primary residence by filing a Chapter 13 where the value of the house is equal or less than the balance of their first mortgage. In such cases, there is no equity securing any part of the second mortgage. Debtors with upside down second mortgages often also have substantial unsecured credit card debt. They could not afford even a first mortgage unless they get relief from their credit card payments.
Some of my own clients have asked me whether they can combine a Chapter 7 bankruptcy and a Chapter 13 bankruptcy to both discharge unsecured debts and then strip their second mortgage from their primary home. The plan is to file a Chapter 7 and discharge all credit card debt. After the Chapter 7 discharge is entered, the debtor would immediately file for Chapter 13 bankruptcy. There would be not automatic stay applied in the Chapter 13 case, but the debtor would be current on his mortgage payments would not benefit from an automatic stay’s protection from foreclosure. The debtor would file a motion to strip the second mortgage in the Chapter 13 case. The debtor would end up with no unsecured debts (all discharged in the Chapter 7) and no second mortgage on his residence (stripped in Chapter 13). Can this plan work?
I don’t think this plan will work, and here’s why. The judges in the Orlando Division have written a standard order granting a motion to strip a second mortgage in Chapter 13 case. The standard order states that the debtor’s second mortgage will be released from the property when the debtor completes the Chapter 13 plan and the court enters a Chapter 13 discharge of any debts not paid in the plan. However, under the new bankruptcy law a debtor is ineligible for a discharge under Chapter 13 if he received a prior discharge in a Chapter 7 case file four years before the current Chapter 13. Therefore, the Chapter 13 filed immediately after the Chapter 7 could not earn a discharge. Since the standard mortgage strip order requires a Chapter 13 discharge, the Chapter 13 filed soon after the Chapter 7 case could not strip the debtor’s second mortgage.
Sure, the debtor could wait four years after the Chapter 7 case to try the Chapter 13 mortgage strip, but by then the debtor either will have defaulted on the unaffordable second mortgage or a market recovery will have increased the property value to the point where a mortgage strip is not allowed.
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Sunday, October 18th, 2009
One of my bankruptcy clients had approximately $700 in a checking account just prior to filing Chapter 7 bankruptcy. Before we filed the bankruptcy petition one of the judgment creditors listed on A bankruptcy called my office to complain that one of the debtor’s judgment creditors garnished the checking account. The debtor called the creditor and asked them to release the writ of garnishment. They refused. Then, the debtor called our office complaining that the creditor was violating the automatic stay by refusing to release the garnishment on the checking account. Is the creditor violating the bankruptcy stay by maintaining a garnishment after the account owner files bankruptcy? I think not.
The writ of garnishment creates a judicial lien on the debtors bank account when the garnishment is served on the bank. Courts have found that the debtor has no affirmative duty to dissolve the bank account garnishment. Further actions in state court to get the money after the bankruptcy filing would probably constitute a stay violation. If the debtor claims an exemption of the bank account funds because, for example, the money represents wages of a head of household debtor, the judgment creditor would have to release the money to the debtor unless the exemption is timely and successfully challenged in bankruptcy court. If the money is non-exempt, then the money becomes part of the bankruptcy estate to be distributed equally among all unsecured creditors. If the judgment creditor had already received the money prior to the bankruptcy by virtue of the garnishment the bankruptcy trustee could claim the money back from the judgment creditor because the garnishment would have produced an unallowable preference. A bankruptcy trustee can void the judicial lien of the garnishment if necessary to recover the preferential payment to this creditor.
The judgment creditor’s duty would be different if this were a wage garnishment. Wage garnishments apply to future wages which are owed to the debtor for his employment after the debtor filed bankruptcy. The debtor’s future wages are not part of the bankruptcy estate and are not available to pre-filing creditors. Courts have held that judgment creditor have an affirmative duty to dissolve a wage garnishment against a bankruptcy as soon as the bankruptcy is filed.
posted by Jonathan Alper, bankruptcy and asset protection lawyer, Orlando, Florida
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Tuesday, October 13th, 2009
Most people who file bankruptcy are good people who do not abuse the bankruptcy system. In fact, almost all of my bankruptcy clients feel bad about wiping out debts they believe they are morally obligated to pay. Then, once in a while, I encounter the sleazy debtor who tries to use Chapter 7 bankruptcy to steal as much money he can from his creditors.
I received a phone call last week from a prospective bankruptcy debtor who asked me about the following pre-bankruptcy planning scenario. One of his good friends was planning do a home repair with a cost of about $25,000. The friend agreed to pay this caller $25,000 in cash which the caller would then hide under the mattress. The caller would pay for his friend’s home repair on his personal credit cards. He would make minimum payments for a few months. Then he would file Chapter 7 bankruptcy and discharge the debt for his friend’s $25,000 repair bill as well as all his previous credit card debt. He wasn’t asking me to take him as a client, but he wanted to consult with me to see if his plan would work.
This is bank robbery under the disguise of bankruptcy. I suspect these types of scams usually slip through the bankruptcy system. This guy will probably get away with it because he’ll not disclose the arrangement to his bankruptcy attorney. It bothers me because, as I said above, the overwhelming majority of bankruptcy debtors are honest people who lost income and are without adequate savings, or are people who bought things they could not afford in order to live above their means. In either case, most bankruptcy debtors do not intentionally borrow money with no intent of trying to pay back the money.
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