Archive for the ‘Chapter 7’ Category
Friday, June 3rd, 2011
Many self-employed debtors file bankruptcy because they have personally guaranteed debt of their failing business. Some of these debtors want to discharge their guarantees of business bank loans or credit cards used for the business, and they want to try to resurrect the business after they have been cleared of personal liability. In such cases, the debtor has to value his interest in the business. The debtor must value his stock, membership interest, or other form of ownership in his business. Where the business had assets, but the business also has liabilities in excess of business assets the value of the debtor’s interest is probably zero because he could not sell to an unrelated third party his interest in his insolvent business. The business value is further reduced by the business’ dependence upon the debtor’s personal labor because a new buyer would have to pay someone to replace the debtor’s labor contribution.
There are two ways to list this type of insolvent business in the debtor’s personal Chapter 7 bankruptcy petition. The debtor could value his stock (or other interest) at zero, or he could value the stock at $1 and claim an exemption for the $1 interest as part of the debtor’s personal property exemption. The question is which is the best way to defend against a trustee challenge that the business interest is worth more money and is part of the debtor’s non-exempt bankruptcy estate.
I suggest that it may be better to value the business at a dollar and claim the exemption. The trustee has a limited amount of time, 30 days after conclusion of the creditor meeting, to object to exemptions. The trustee has a longer time, at least 60 days after the meeting, to file an adversary proceeding which asserts greater value to the debtor’s business and requests the debtor’s turnover of the business interest. Better for the debtor to impose a shorter challenge period upon the trustee by claiming a minimal value of an insolvent business and including the business interest in the exempt property list.
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Saturday, May 14th, 2011
One of my Chapter 7 bankruptcy clients wants to discharge a judgment in favor of his former wife’s attorney. A family law judge issued a judgment for sanctions against my client for frivolous litigation during a dispute over enforcement of a property settlement. The judgment was issued in favor of the ex-wife’s attorney for his attorney fees defending my clients continued and baseless challenges to the ex-wife’s enforcement of the property settlement. The client wants to know if a Chapter 7 bankruptcy could discharge the debt to his ex-wife’s attorney.
Whether divorce related attorney fee judgments are dischargeable depends upon the underlying proceeding. Chapter 7 bankruptcy does not discharge obligations for “domestic support” including alimony and child support. Chapter 7 bankruptcy does not discharge attorney fee judgments when the fees were incurred to obtain or enforce domestic support obligations.
Equitable distribution judgments are dischargeable. I think that attorneys fee judgments related only to equitable distribution and property settlement awards would also be dischargeable in bankruptcy.
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Friday, April 29th, 2011
Almost all of my blog posts are intended to inform prospective bankruptcy debtors. This post is intended to help bankruptcy trustees.
I wrote a post on my asset protection blog about Florida’s annuity exemption being limited to annuities issued in Florida. The post explained that Florida residents who purchased an annuity while they resided in another state before moving to Florida may find that their annuity is not exempt under Florida law. Most annuity contracts state that the law applicable to the annuity is the law of the state where the annuity was issued which in most cases will be the state where the debtor resided when the annuity was sold. The question is in not where the annuity company is located; it’s where the debtor/owner lived when he entered into the annuity contract.
Florida debtors cannot export Florida’s exemptions to another state. I believe that an annuity which was purchased and issued in another state whose laws do not exempt annuities may not be exempt when the debtor subsequently files bankruptcy in Florida. The same issue applies to other assets outside Florida, such as IRAs, which were opened and still maintained in offices and accounts in another state.
Over the years I have had many bankruptcy clients claim exemptions for their annuities and other financial assets such as IRAs. I have never heard a bankruptcy trustee ask where the debtor lived when he bought the annuity or where the debtor opened and maintains his IRA account.
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Monday, March 28th, 2011
Bankruptcy trustees seem to be getting tougher on debtors who incur significant credit card debts and large secured debt obligations prior to filing Chapter 7 bankruptcy. I am seeing challenges asserted against significant credit card charges within six months prior to filing bankruptcy. That does not mean that you cannot use a credit card for six months before you file. It means that large charges or a substantial increase in credit within the prior six months could draw scrutiny.
In my experience, more than half of my clients have increased unsecured borrowing in the months leading up to their bankruptcy. Some for good reason; some for not good reasons. Some people, after they see bankruptcy as a good option, will intentionally run up credit cards to buy things they want but do not need. These people are trying to take advantage of their creditors and the bankruptcy system; trustees should come down hard of this type of debtor abuse.
Other people file bankruptcy reluctantly after a financial setback such as a job loss, pay decrease, or unexpected large debt. These people will use credit cards to buy necessities because they hope that their fortunes will improve and they can avoid bankruptcy. In my opinion, such individuals should not be penalized for increasing debts.
However, as a practical matter, if creditors and trustee do not distinguish properly the good and bad reasons for credit card debt prior to bankruptcy these people with good motives are taking a big risk when they borrow in order to buy time to work out of their financial situation. If they are unable to increase income, or decrease expenses, these well-intentioned debtors may have recent debts challenged in Chapter 7 bankruptcy.
People in financial difficulty may have a difficult choice. Few people want to file bankruptcy. But bankruptcy may be the more conservative option at the onset of financial problems. For if you need to incur debts to sustain you while you look for non-bankruptcy solutions you may find that bankruptcy is a more difficult and risky option if your self-help efforts don’t work out because the debt you incurred during your hardship may be challenged. .
Posted in Chapter 7, Planning Tips | Comments Off
Tuesday, March 15th, 2011
Once you file Chapter 7 bankruptcy you are committed; you do not have the right to dismiss a Chapter 7 bankruptcy without court approval. If soon after you file bankruptcy you incur a large debt which cannot be added to the case already filed you may be stuck with this debt.
I read an interesting exchange among some attorneys dealing with this problem. A debtor was hit with a huge, unexpected unsecured debt soon after they filed a Chapter 7 bankruptcy. The attorneys discussed a creative of way for the client to file a new bankruptcy to include the new debt.
The bankruptcy law prohibits filing a Chapter 7 bankruptcy within eight years of filing date of a previous bankruptcy in which the debtor obtained a discharge. One of the attorneys in this discussion suggested that the affected debtor intentionally not take the financial management class required of debtors after their petition is filed. The court will issue a reminder, and if the debtor still does not file a certificate that he completed the class the court will close the current bankruptcy case without issuing the debtor a discharge. As soon as that happens, the same debtor can file a new Chapter 7 bankruptcy including the new debt. Because no discharge was entered in the first bankruptcy the debtor will not be affected by the eight year time limit.
This seems to be a creative solution to this particular problem. I don’t know if the same solution would work to solve other issues such as the debtor inheriting money within six months after filing bankruptcy. In that type of situation I think the trustee would find a way to keep the case open and capture the money regardless of whether the debtor completes his education requirements.
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Monday, March 14th, 2011
One of my bankruptcy clients calls my office to complain that his homeowner association has threatened to put a lien on his house for non-payment of HOA dues. The client complained that he had listed the HOA as a creditor on his Chapter 7 bankruptcy petition.
HOA dues are an ongoing debt, and new payments are due each month. The client’s Chapter 7 bankruptcy may discharge personal liability on HOA debts accrued prior to filing which had not been perfected by a lien. The bankruptcy does not discharge new dues assessments for months after the bankruptcy filing and during the bankruptcy case. Not paying HOA dues post-filing will result in a lien.
Look at it this way. You discharge debts; you do not discharge creditors. Listing a creditor in bankruptcy for your old debts does not stop the same creditor from pursuing debts to the creditor incurred after filing.
Posted in Chapter 7, Client Questions | Comments Off
Monday, March 7th, 2011
For those blog readers considering bankruptcy, I composed a video cartoon explaining the basics of of filing Chapter 7 bankruptcy in Florida. You are invited to watch and learn.
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Monday, February 28th, 2011
Your potential lawsuits against some else, such as personal injury suits or class action suits, are assets in your bankruptcy case. Many people innocently overlook a potential claim that has not yet been filed as a lawsuit; other people intentionally try to “play games” with their claim in order to justify, to themselves at least, omitting their claim and potential lawsuit from their bankruptcy case.
Today’s case in point comes from an exchange I heard in bankruptcy court while waiting for my own client’s case to be called. A man filed Chapter 7 bankruptcy pro-se, that is, without an attorney. After he filed his bankruptcy he initiated a lawsuit in Florida to recover money damages. The defendant settled and agreed to pay the debtor a significant amount of money. The defendant wrote a check to the trust account of the debtor’s attorney. By this time, the debtor’s bankruptcy case has been closed and a discharge entered.
Then the debtor’s civil attorney does something his debtor client did not expect. The attorney checks the public legal records, and he finds out about the bankruptcy filing. The attorney does not want to pay the debtor money which the attorney now knows, as a result of the search, may belong to the bankruptcy trustee. The attorney contacts the trustee. The trustee files a motion to reopen the bankruptcy case to intercept the damage award and distribute the money to the debtor’s creditors. The civil attorney will still get paid. The judge granted the trustee’s motion so the creditors will get the money.
The judge did not penalize the debtor. Maybe the judge felt that depriving the debtor of the money the debtor had expected was enough of a penalty. However, over the past years I have had a few cases where I found out fortuitously about a bankruptcy client’s lawsuit recoveries after their bankruptcy case was over. I think this issue is more common than most people realize. Maybe a court should deny someone’s discharge for not revealing a significant claim that existed before they filed. That kind of case would send a needed message to prospective bankruptcy filers who think they can hide plans to file future lawsuits.
Posted in Chapter 7, True Stories | Comments Off
Tuesday, February 22nd, 2011
When you file bankruptcy you are supposed to list any current lawsuits you have against anyone else, such as a medical malpractice suit, as well as any potential claim against a third party which claim may later result in you filing a lawsuit. Your lawsuits and claims are part of the bankruptcy estate. The trustee can either prosecute the lawsuit in your behalf or he can sell the claim or lawsuit and distribute proceeds to your creditors.
Frankly, some people do not list potential claims and possible future lawsuits. They figure they can file a lawsuit after the bankruptcy is over and that the trustee will not find out about it. One problem with this debtor strategy is that the person you later sue can dismiss the lawsuit because you did not list the claim in your bankruptcy.
I read a post in the Los Angeles Bankruptcy Law Monitor about a court which applied the theory of judicial estoppel to defend a lawsuit by a plaintiff who had recently filed bankruptcy and did not list the potential lawsuit as an asset. In laymen terms, judicial estoppel means you cannot take inconsistent positions in different judicial proceedings. You cannot tell the bankruptcy court you have no claims and then assert a claim in civil court soon thereafter. In this case, the court dismissed a lawsuit because the plaintiff’s recent bankruptcy asserted that the debtor had no claims or reasons to sue anyone.
Posted in Chapter 7, Court Decisions | Comments Off
Monday, February 14th, 2011
A prospective client from Miami wants to file bankruptcy. He is in the process of getting divorced. He and his spouse each has an attorney. The spouses have a tentative oral agreement for the divorce which agreement includes payment of $100,000 of child support in equal payments over a four year time frame. The client’s principal asset is a money market account with $225,000. He asked me if he can pre- pay the child support in a lump sum to dispose of his cash and then file Chapter 7 bankruptcy. After all, he reasons, the child support is a priority debt in bankruptcy and would have to be paid before his unsecured creditors.
It’s ok to pay a priority debt , like taxes, before filing Chapter 7 bankruptcy, but the debt has to be owed at the time it's paid. Generally, a debtor cannot pay a third party money for future debts not yet due. Payment without bona fide debt is a form of a fraudulent transfer.
I think this debtor could structure his divorce settlement to include an immediate obligation to pay his wife $100,000. If the spouses negotiate an arms length divorce agreement they may include, as one of the many negotiated rights and obligations, a current debt of $100,000 0wed to the spouse for alimony or support. The client would argue that his debt was due now, or as soon as the final divorce agreement is signed, and that there was consideration for his immediate payment because it was one of many negotiated terms in a divorce resolution. If someone argued that the $100,000 legal obligation was structured for the debtor’s benefit as part of a “conspiracy” of the spouses, the debtor would point out that the divorce negotiation was adversarial with each spouse having their own attorney..
I’m not sure this alternative plan would work but it has a much better chance than simply pre-paying a debt due in smaller increments over a period of future months. Making future child support debt into an immediate priority debt and the debtor may be able to losing his cash in a bankruptcy proceeding..
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