Archive for the ‘Chapter 7’ 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.
Posted in Bankruptcy Questions, Chapter 7 | Comments Off
Thursday, August 12th, 2010
There is the well-known proverb that, to a carpenter everything in the world looks like a nail. Or, surgeons want to operate to cure any and all ailments. The same is applicable to some bankruptcy attorneys. I assisted a couple with asset protection last year. The couple faced joint liability from a failing business investment. They had $150,000 liquid cash, and they were expecting another $200,000 from the proceeds of a real estate sale. I explained that they would lose the cash in bankruptcy. I advised them to spend down the cash and possibly invest in a new homestead which would be exempt I they were sued.
Since my advice, the creditor sued and obtained a judgment against the couple. The couple too al their liquid cash remaining, about $310,000, about bought a $400,000 homestead with a small mortgage. The creditor began aggressive collection efforts. The collection fight made the couple nervous and fearful about their assets so they consulted a bankruptcy attorney with the hope of putting the problem behind them.
As the couple reports, the bankruptcy attorney told them that the money used to purchase the house was not exempt in a Chapter 7 bankruptcy first, because the amount of equity invested in the homestead exceeded the bankruptcy exemption(about $275,000) permitted within 40 months of purchase, and two, because the conversion of substantially all their cash to a homestead could be attacked as a fraudulent conversion in bankruptcy. He told these people to file a Chapter 13 bankruptcy so that their house would not be liquidated and they could pay only their available monthly cash flow to their creditors.
I think Chapter 13 bankruptcy would be a poor idea for these debtors. In a Chapter 13 bankruptcy the debtors have to pay through a five year plan not only what they clear each month after reasonable expenses but also all the money their creditors would have received in a Chapter 7 liquidation. If these people had filed Chapter 7 the trustee would have claimed as non-exempt part or all of the $310,000 they invested in their homestead. The non-exempt homestead equity (it could be all if seen as fraudulent conversion) would still have to be paid to the Chapter 13 trustee during a five year plan. In any bankruptcy, 7 or 13, their homestead equity is at risk.
If they simply stayed far away from bankruptcy as I had originally advised their creditor had no way to attack any of their homestead exemption in state court collection. I think their bankruptcy attorney pushed them to Chapter 13 because bankruptcy is the only tool in his legal toolbox- just like the carpenter or the surgeon only uses the tools he is comfortable with. The bankruptcy attorney failed to appreciate that these people had better legal protection tools outside of bankruptcy court.
For most people heavily in debt bankruptcy is the only tool to fix their situation. People with assets should get a second and even a third opinion before filing bankruptcy. Bankruptcy filings are usually irrevocable- once you go in you cannot get out.
Posted in Chapter 13, Chapter 7, True Stories | Comments Off
Monday, August 9th, 2010
Many mortgage companies ask Chapter 7 bankruptcy debtors to sign reaffirmation agreements if they intend to stay in their house through their bankruptcy. Reaffirmation means that the debtors will remain personally liable on their mortgage note after the bankruptcy discharge, and it means the lender can sue them if they subsequently are unable to make payments. I saw a good discuss of the mortgage reaffirmation topic in a blog post by Atlanta bankruptcy attorney Jonathan Ginsburg. Mr. Ginsburg points out two problems with not signing a reaffirmation; first, future mortgage payments do not help restore credit, and two, without reaffirmation the bankruptcy is a technical mortgage default. In addition, I have found that bank's do not cooperate with debtor's who subsquently need documentation, such as payoff numbers, if they have not formally reaffirmed personal liability after bankruptcy.
Notwithstanding the above, I advise my clients not to reaffirm mortgage debt because doing so results in a large personal financial liability. I agree with Mr. Ginsburg's conclusion that lenders will unlikely default a mortgage for any reason as long as the borrower is making payments. I also agree that merely continuing current payments by itself will not result in personal liability absent a signed reaffirmation agreement.
Posted in Chapter 7 | Comments Off
Thursday, August 5th, 2010
If you plan on marrying someone facing bankruptcy do you also marry their debt? Generally, the answer is "no", but in some cases, your fiance’s debt walks down the aisle. You are not liable for your spouse’s debt- that’s the general rule. Sometimes you end up paying the debt anyway. Consider the case of young couple who came to my office this week.
A young lady had over $50,000 of credit card and related debts. She was a school teach with income of approximately $30,000, well below median income. She had no non-exempt assets and based on her income alone she could solve her debt problems with a Chapter 7 bankruptcy. She stated that she recently married a man whose income was near $75,000. The husband had no unsecured debts. Because means test income is based on "family income" her new husband’s income had to be considered in the wife’s means test even though the husband had no need to file bankruptcy. I explained to the new client that because she was living with her relatively affluent new husband she had become ineligible to file Chapter 7, and her only bankruptcy option was a repayment plan under Chapter 13. In effect, her she and her husband would have to use the husband’s earning to repay part of the wife’s debt in Chapter 13. The husband married his wife’s debt.
People considering both bankruptcy and marriage should speak with a bankruptcy attorney before they get married. In this case, the wife could have, and should have, filed Chapter 7 bankruptcy before the wedding day (or, at least before she and her husband began living together as one household). In other instances, marriage can increase household size to help qualify for Chapter 7, or marriage can result in the merging of financial accounts and other property that make valuable assets exempt in a subsequent Chapter 7. Marriage, divorce, and bankruptcy are interrelated; proper legal planning can either save or cost you substantial money.
Posted in Chapter 13, Chapter 7 | Comments Off
Wednesday, July 14th, 2010
The United States Supreme Court rarely accepts cases that affect consumer bankruptcy debtors. Recently, however, the Court considered an issue that potentially impacts all debtors – the treatment of exemptions.
The term "exemptions" refers to property you own that is protected from the reach of the trustee or creditors. For example, every state provides for exemptions that include your clothes, a certain amount of household goods, a certain amount of equity your car, and a certain amount of equity in your home. Georgia has fairly stingy exemptions – you can read the Georgia exemption law by clicking on the link.
When property is declared as exempt, it does not count for purposes of counting up your assets. If you own property that exceeds the exemption available to you, that property could be seized and sold by a Chapter 7 trustee or it could force you to pay back a higher percentage of your unsecured debt in a Chapter 13. Exemption planning and exemption calculation are important functions for consumer bankruptcy lawyers.
The Supreme Court decision in Schwab v. Reilly requires debtors and their attorneys to be more exact when identifying exemptions, and applies to cases filed in Georgia and everywhere else in the United States. The article that follows is a guest post written for this blog by Brandon Moreno, Vice President of the Utah Bankruptcy Hotline. The Utah Bankruptcy Hotline maintains a network of unaffiliated Utah bankruptcy lawyers who provide debt relief and bankruptcy counsel to consumers in Utah.
On June 17, in Schwab v. Reilly, the U.S. Supreme Court issued a decision that limits the extent to which individuals filing under Chapter 7 can exempt their property from the bankruptcy estate. The case arose out of the interplay between two important rules. One imposes dollar-value limits on the extent to which a debtor can exempt certain types of property. The other requires interested parties to object to a debtor's claimed exemptions within 30 days after the conclusion of the creditors' meeting, or else lose the ability to retain any of that property for the bankruptcy estate.
The question in Schwab was, what happens when a debtor both reports an asset with an estimated market value and claims an exemption for the asset equal to the market value, the trustee does not object because the claimed exemption falls within the applicable-dollar value limit, and it later becomes apparent that the asset's true market value exceeds the claimed value and the applicable dollar-value limit? According to some lower courts, the trustee's failure to object entitled the debtor to an exemption equal to the entire market value, regardless of whether that value exceeded the limit imposed by the rules. In Schwab, however, the Supreme Court rejected that approach. According to the Court, the trustee need not have objected to the exemption to preserve the estate's ability to recover value in the asset beyond the value the debtor declared exempt. The rationale for this conclusion was that the trustee had no basis for objecting in the first place–on its face, the exemption appeared to comply with the limit imposed by the rules, and there was no way of knowing beforehand that the asset would appreciate in value beyond the limit.
The Court's analysis was somewhat complex, but an example helps to illustrate the effect of the ruling. Imagine that an individual files for Chapter 7 protection and reports an asset–in this example, office equipment–to which he assigns an estimated market value of $5,000, that he claims a $5,000 exemption for the equipment, and that the applicable dollar-value limit on office equipment exemptions is also $5,000. Given the dollar-value limit, the trustee concludes that the claimed exemption is appropriate and therefore does not object. The thirty-day objection period then passes, and a third-party appraises the equipment and assigns a market value of $8,000. Under the prior approach of some lower courts, the trustee's failure to object would have entitled the debtor to an $8,000 exemption for the equipment. But Schwab invalidates that approach and establishes that the debtor will be entitled to an office equipment exemption of $5,000, even though the true value of the equipment exceeds that amount by $3,000. The $3,000 remainder goes to the bankruptcy estate, to be distributed among the creditors.
For individuals contemplating Chapter 7 bankruptcy, the lesson of Schwab is twofold: First, even if you accurately report an asset's value and claim a valid exemption equal to that value, you cannot later capture any serendipitous increase in value beyond the limits imposed by the rules. Second, if for some reason it is important to you to exempt the full market value of an asset or the asset itself, rather than a particular monetized interest in the asset, Schwab suggests that it might be appropriate to claim an exemption for "full fair market value (FMV)" or "100% of FMV." Thus, going back to the example above, the debtor might try to claim an exemption of "100% of FMV" for his office equipment, rather than $5,000. A court could reject this claim if it later became apparent that fair market value exceeds the $5,000 limit. But Schwab also suggests that phrasing an exemption claim in this manner effectively places other parties on notice that the debtor seeks to exempt the entirety of the asset's value. If a debtor provides this notice and others nevertheless fail to object, the debtor may be able to keep a subsequent increase in market value beyond the otherwise applicable dollar limit.
Posted in 13 , Bankruptcy, Chapter 7, Chapter 7 issues, Debtors, Exempt Property, Protected property issues, a, accepts, an, and, appraises, assigns, bankruptcy exemptions, calculation, cases, chapter, claimed, court, entitled, equipment, exemption, falls, hotline, hotline , maintains, market, network, object, office, passes, planning, rarely, reilly, rejected, requires, schwab, states, supreme, the, third party, united, united states supreme court bankruptcy decision, utah, v, the | Comments Off
Tuesday, July 13th, 2010
There are usually several things you can do to prepare for filing bankruptcy if you can anticipate the need to file months in advance. I consulted with a client living in Ft. Myers who he will need to file Chapter 7 bankruptcy by the end of this year. He needs to wait until year end so that his repayment of family loans in 2009 will not be reversed as preferential payments chosen creditors. The told me he usually gets a significant tax refund and asked me if there is anything he can do to avoid losing the refund over to the bankruptcy trustee after his creditor meeting anticipated early in 2011.
I suggested that this client change his income tax withholding to zero for the balance of the year. My CPA tells me that taxpayers have the right to set their withholding amounts. If the client does not withhold taxes for the second half of the year he will probably wipe out any tax refund accrued during the first part of the year and end up owing taxes when he files in April, 2011. There will be no tax refund receivable if he files bankruptcy later in 2010. The client can spend the extra money not withheld by the IRS on necessary house or medical expenses, bankruptcy attorney fees, or on a dream vacation. This person is not obligated to give the IRS money now to hold for the benefit of his creditors and a bankruptcy trustee after filing. Better that the client use the money for himself than forfeit a 2011 refund in his bankruptcy case.
Posted in Chapter 7, Tax in Bankruptcy | Comments Off
Monday, June 28th, 2010
I went to a trustee meeting last week with a single debtor who owned a car free and clear. The car blue book value was $10,000. The debtor said the car "needed work" and that she had a repair estimate of $3,000. I looked at the estimate and most of the items were normal maintenance- new plugs, new belts, brake job etc. There was a single scratch on the exterior. In the debtor’s best case, this car had approximately $6,000 non-exempt equity which amount the bankruptcy trustee could demand from the debtor.
Before the meeting, my client was very upset about her car. She was unemployed. She lived with a family member who also was unemployed. She had no money and no prospect of future employment to buy back the non-exempt car equity from the trustee. Without a car, she said she had no way to look for a job or to go to a job if she found one. Things looked bleak- I explained that the trustee is not a bad person who is only doing his job by going after the $6,000 car equity.
So, the debtor tells the trustee about why she filed bankruptcy. She had to quit her job because she was being stalked by a neighbor and because her mother was very ill. She moved in with a relative because she had no money. She used credit cards to survive. Employment prospect were bleak in her home town.
The trustee never mentioned the car issue. The debtor had previously given the original car title and a picture of the car to the trustee. The trustee handed the debtor the car title without comment. The trustee left the meeting and drove home in the car. The trustee is very experienced and competent; he knew about the car equity. This debtor who had suffered a series of personal misfortune got a big break at the trustee meeting, and I don’t know why. Sometimes in bankruptcy you just get lucky.
Posted in Chapter 7, True Stories | Comments Off
Wednesday, May 12th, 2010
A few days ago I wrote a blog post comparing the asset protection of Totten trusts and UTMA("uniform gift to minors") financial accounts. I explained that the Totten trusts were not exempt from the bankruptcy estate because the accounts could be revoked or invaded by the parent, whereas the UTMA accounts were protected because deposits made to these accounts are legally irrevocable. The asset protection of the UTMA account presumes that the parent follows the law.
A caller from Miami had read the UTMA blog posts and wanted to confirm the protected status of his child’s account. The story is told that a few years ago when the caller was "rich" he made a six figure deposit into his only child’s UTMA bank account. His intent was to set aside some money for his child’s college education. Then, the recession. The caller lost over a year ago. He spent his savings supporting his family. In his last effort to keep his house he began paying his mortgage from his child’s UTMA account. He wants to know whether a bankruptcy trustee could take his UTMA account in the event he files Chapter 7 bankruptcy because he wants to continue using the money to pay the house mortgage until he finds work.
I think a bankruptcy trustee would have a good argument to include debtor’s UTMA account in the non-exempt bankruptcy estate. The law protects UTMA accounts because this type of account is an irrevocable gift to a minor child. When this parent disregards the irrevocable nature of the account and treats the money as his personal savings account he is destroying the reason for the account’s protection. Debtors should not be allowed to asset protect their own savings and checking accounts just by bestowing them with a UTMA label.
If debtor’s want to protection benefits of a UTMA account they must follow the rules; once the parent gives the money to the child’s UTMA account the parent cannot get it back. If the parent does not follow that simple rule then they should forfeit the UTMA benefits and the protection in a bankruptcy proceeding.
Posted in Chapter 7 | Comments Off
Tuesday, April 20th, 2010
Chapter 7 bankruptcy debtors facing foreclosure against invested in multiple properties face unexpected jeopardy from unpaid homeowner association or condominium association fees and assessments. One of my Chapter 7 bankruptcy debtors owned four properties facing foreclosure. Each property had a homeowners association. The debtor suffered a severe income reduction. He fell behind in all mortgages and could no long afford to pay his HOA monthly dues.
The debtor’s Chapter 7 bankruptcy filing delayed the foreclosure actions for a few weeks. The court entered a discharge. The banks continued foreclosure litigation after the court lifted the stay. The mortgage foreclosures took many months to complete after the discharge. The debtor was not concerned because his bankruptcy discharged any potential deficiency judgment as the mortgage debt was incurred prior to filing bankruptcy.
The problem was the debtor’s liability for homeowner’s dues.The bankruptcy eliminated the debtor’s liability to the HOAs for dues which became due prior to the filing date. However, bankruptcy courts consider HOA dues to accrue monthly. The debtor’s HOA liability that accrued in the months after the bankruptcy was filed is new debt and was not discharged in bankruptcy. The debtor’s HOA liability continued until the dates of the foreclosure sales on each property.
As a practical matter, few HOAs will pursue a judgment against a debtor who has recently filed bankruptcy. By the terms of the bankruptcy, such debtor has no non-exempt assets when he files and is unlikely to have accumulated assets in the brief period between bankruptcy and foreclosure. However, bankruptcy debtors with HOA liability should be aware that bankruptcy does not end liability for HOA dues.
Posted in Chapter 7 | Comments Off
Thursday, April 15th, 2010
Earlier this month I received a call from a Chapter 7 client that I had represented several years ago. He is attempting to refinance his house and has discovered that a judgment creditor has a lien for several thousand dollars. The creditor was listed on the case, but neither he no I knew that there was any judgment.
I directed him to visit the county courthouse and pull the file for this case. He did and he reports that the return of service shows that his wife was served by a sheriff's deputy. His wife has no recollection of being served. We did list the creditor on the bankruptcy petition but because we did not know that there was a judgment, we did not file a motion to avoid the judgment lien. What can he do?
There are a number of lessons you can learn from this man's experience. First, you should always obtain copies of credit reports from all 3 credit bureaus prior to filing bankruptcy. In Georgia, you can get a free credit report from each of the 3 main credit bureaus twice a year. Online, you can go to annualcreditreport.com and download your reports. Because credit reports obviously contain sensitive information the annualcreditreport.com system will ask several questions to identify yourself. These are usually multiple choice questions – for example, the system may say "your credit report shows that you previously lived on one of the following streets: (a) Oak Street (b) Thompson Street (c) Ivers Road (d) none of the above.
If you are unable to answer these questions, the system will instruct you to mail away for your credit reports – here is a link to a page on my website with the credit report request letters.
Credit reports are helpful because they will usually show pending lawsuits as well as the names, address, account numbers and debt amounts for most of your creditors. Obviously I can't require all bankruptcy clients to bring me credit reports but it sure helps avoid "forgotten" creditors or judgments.
As far as what we can do, there are a couple of options. First I want to make sure that service of process was correct. If you are served with a lawsuit in Georgia, the sheriff's deputy (or private process server) has to complete a document called a "return of service" that states when a party was served and by whom. Section 9-11-4 of the Official Code of Georgia provides that service on an individual must be made on the defendant himself, or "by leaving copies thereof at the defendant´s dwelling house or usual place of abode with some person of suitable age and discretion then residing therein."
In this case, if the sheriff's deputy served my client's wife, then service is most likely valid.
However, I sometimes see situations where the return of service is unclear as to who was served or even situations where the return of service is blank. In these cases, a defendant can "collaterally attack" the judgment on the grounds that service was not made and he did not know about the lawsuit.
If it turns out that service is valid, my client will have little choice but to negotiate a settlement of the real estate debt. Interestingly the Chapter 7 discharge would eliminate any personal liability he might have for this debt, but the liability remains as to his real estate.
My experience has also been that judgment creditors will become more amenable to negotiation the longer a real estate lien remains unpaid. Here, my client could forego a refinance (or threaten to to forego a refi) and use the argument that the judgment creditor might have to wait for years to get paid as leverage to negotiate a reduced payoff.
Posted in Chapter 7, Chapter 7 issues, Credit, Negotiation, Post bankruptcy credit rebuilding, a, amenable, avoid, bankruptcy and judgments, client, deputy, estate, forego, judgment, lawsuit, letters credit, lien, lien , longer, my, or, post-bankruptcy, private, process, real, refinance, remains, report, reports, request, served, server, the, threaten, unlisted judgment creditors, unpaid , wife | Comments Off
