The bankruptcy committee of our local Bar association holds monthly luncheons. At the most recent luncheon two Chapter 7 bankruptcy trustees discussed the bankruptcy process from the trustee’s point of view and offered a few good suggestions to debtors’ attorneys. One of there comments concerned the treatment of debtors’ household furnishings. Florida law provides each debtor with a $1,000 total exemption for all personal property including bank accounts and household furnishings. This exemption is small compared to most other state’s laws. In practice, few trustees pursue personal property valued slightly over the exemption nor challenge property valuations in most Chapter 7 petitions unless there is a clear reason to doubt the debtor’s property list.
At the bar meeting the trustees suggested that the Chapter 7 trustees may be taking a closer look at personal property lists and values. They indicated that most trustees may be sending an appraiser to the debtors homes to take an inventory whenever the debtor’s home is valued more than $500,000. It is hard to believe, they said, that a home worth more than a half million dollars in today’s real estate market contains less than $2,000 (joint filing) of furniture and electronic equipment. The trustees stated that bankruptcy debtors whose homes and personal property lists will likely be scrutinized consider hiring their own appraiser to value their property before they file their petition and submit their own personal property appraisal to the trustee.
It costs only two or three hundred dollars for an appraisal of household property. In the past, when my clients’ income or house size implied expensive furnishings I have suggested the client retain one of the appraisal firms used by the Chapter 7 trustees so that the trustee would not challenge the appraiser’s credentials.
Whenever a debtor suspects that his personal property schedules will be questioned by the bankruptcy trustee it is a very good ideal to get a preemptive appraisal. When you hire the appraisal you schedule the date and time of the appraisal. You’ll know well in advance when this appraiser will be going through your home to inspect your belongings. Your own appraisal is not binding, and you don’t have to use the results on your petitions is you disagree in good faith with the appraiser’s report.
The trustee speakers offered debtors another practical suggestion when the debtors know they have non-exempt personal property including furniture or automobiles. Typically, trustees and bankruptcy debtors negotiate the amount and terms of the debtor’s "buy-back" of non-exempt cars and personal property at or after the trustee meeting. These trustees suggested that debtors decide what they would like to offer the trustee in payment and then bring a cashiers check for the amount of their offer to the trustee meeting. In other words, make your offer an literally put the cash on the table. The trustees said they are usually willing to accept significantly lower valuations and buy-back offers when the offer is accompanied by certified funds.
Bankruptcy debtors do some strange things. A couple came to see me about a debt they forgot to put in their bankruptcy petition. The husband filed Chapter 7 bankruptcy in 2007 by himself without an attorney. The case is closed; discharge entered. Its in the archives. A year earlier, the husband had tried to sell his motor home to a third party. The husband could not deliver title to the motor home because there was a lien on the home. The agreed sales price was $40,000 but the lien was $60,000. The buyers must have wanted the motor home really badly because they gave the husband the $40,000 as long as he promised to pay off the lien as soon as he could.
The husband gave the entire $40,000 to the bank with the lien. He never could clear or pay off the lien with other money. In the meantime, the bank kept deducting the monthly lien payments from the $40,000 until, a few years later, there was no more money. The husband never spent any of the money on anything but the loan payments.
You can probably guess what happens next. When there was no more money left in the fund to make payments the bank repossessed the motor home from our surprised buyers. The buyers paid the agreed price and thought everything was taken care of. Now, the husband wants me to add the aggrieved buyers to his bankruptcy petition even though the case was closed. There are a couple interesting legal issues.
The first issue is whether the husband can add a creditor to his closed bankruptcy. The general rule is that debtors can reopen a case to add creditors so long as the creditor’s claim existed prior to the bankruptcy filing. There is an exception when the bankruptcy estate had non-exempt assets which were made distributed to the creditors of record because, in that event, there would be no way to reallocate the available assets. Fortunately, in this case, there were no assets in the estate available for distribution.
A second issue is whether the buyer had a claim, and whether the buyer was a creditor, when the husband filed bankruptcy. Or, did the buyer’s claim first accrue when the bank repossessed the motor home after the bankruptcy was filed and closed. The bankruptcy Code defines "claim" very broadly. When the buyers took possession of the motor home subject to the husbands promise to pay off the lien I think the husband incurred a debt and obligation to the buyers who in turn had a claim against future performance. I think there was a claim, broadly defined, when the petition was filed and that the husband can reopen the case. I expect that the buyer will contest the motion to reopen. It will be interesting to see what the court says.
I received an email from a man who was considering Chapter 7 bankruptcy to discharge a substantial amount of credit card debt. The man was married. He and his wife owned joint bank accounts with significant balances. His wife had no credit card debt. The spouses were jointly liable on a first and second mortgages on their primary residence. The house was going into foreclosure. The house value may have declined to an amount which is lower than even the first mortgage balance. Question: can the wife file Chapter 7 bankruptcy and protect their joint bank accounts.
Joint bank accounts are presumed to owned tenants by entireties. All tenants by entireties property is exempt in Chapter 7 bankruptcy of one spouse if the debtor spouse and non-debtor spouse have no joint unsecured debt. Usually, the issue is whether the spouses have joint unsecured credit cards or tax liability. In this case, the non-debtor spouse has no unsecured debt either individually or jointly with the debtor. But, there is a problem.
The couple borrowed two separate mortgage loans. Mortgages are secured debts. When they made the mortgage loans the couple had two joint secured debts. The joint secured debts do not jeopardize their entireties bank accounts. The decline in their home value has caused the second mortgage to be unsecured by the house. The legal question is whether the second mortgage is a joint secured debt because it was secured when created, or whether it is now a joint unsecured debt because its security in the house has been destroyed by the declining market.
I think the second mortgage is a joint unsecured debt. The debts should be evaluated at the time the bankruptcy is filed. The second mortgage debt may cause the joint bank account to lose its entireties exemption. As a practical matter, it the debtors have evidence that the house value is even a little bit greater than the first mortgage balance they may be able to protect their joint accounts if the husband files bankruptcy because a partially secured mortgage should be classified as a joint secured debt rather than a joint unsecured debt.
I have been representing debtors in bankruptcy cases filed in the Northern District of Georgia for over 20 years. Until the law changed in 2005, filing bankruptcy was a fairly straightforward process – often I would meet with a client, decide whether to file and select Chapter 7 or Chapter 13, collect information about creditors, develop a budget, then file that day.
Attorney's fees and filing fees in those days were relatively low and relatively hassle free. Most Chapter 7 cases processed through to discharge, and Chapter 13 cases worked as long as the debtor remained employed and committed to making his case work.
Fast forward to October, 2005 – the time that the BAPCPA amendment to the Bankruptcy Code went into effect. The system became significantly more complicated. Clients were expected to gather page after page of documents, lawyers were charged with performing extensive budget calculations (the median income and means test).
Fees went up because both the attorney's liability and the amount of work required increased greatly. And what is the end result? Many people with limited income and no hope of paying it back are filing Chapter 7. Others who would have fit into Chapter 7 sometimes do not qualify immediately and end up having to delay their filing for a few months. Folks with some capacity to pay end up in Chapter 13, but trustees are more demanding and Chapter 13 plans that would have worked under the old law do not always work now.
Honest, hardworking men and women have to jump through hoops and pay a lot more money. In my career I can count on the fingers of one hand the number of clients or potential clients who I felt were dishonest. Those with the goal of gaming the system are not deterred. If the purpose of the BAPCPA amendments were to ferret out fraudsters, it has been a complete waste of time.
Another unintended consequence of the BAPCPA laws – deserving debtors do not seek the relief to which they are entitled because they get frustrated with all the paperwork required. Many of these folks remain in financial limbo – unable to save or psychologically move forward because of crushing debt. In a macro-economic sense I wonder if the country is better off with these folks living in financial purgatory rather than moving on with a fresh start.
My colleague, South Carolina bankruptcy lawyer Russ DeMott, and I were chatting about this tendency of deserving debtors to give up or delay filing because of the burden that the Bankruptcy Code places on debtors in terms of document production, costly credit counseling that offers marginal benefit and record keeping. Russ calls this syndrome "financial repression" and he has written a compelling and thoughful article about this problem. Russ has given me permission to republish his article on this blog, which will be the next post published here. You should also check out Russ' Charleston bankruptcy blog. Your feedback is welcomed.
This week I read a decision from a south Florida bankruptcy court which dealt with a few issues I frequently see in my own bankruptcy practice. Many of my clients have borrowed money from their 401k to help pay their bills before bankruptcy.. The tell me they have to make a minimum amount of loan repayments each month to avoid having to declare the loan balance as a withdrawal subject to income tax. The clients state that their loan repayments are "required" and ask is the minimum monthly loan repayment is deductible as an expense in their means test.
The 401 k payments are not allowable bankruptcy expenses. This bankruptcy judge pointed out that most courts which have previously considered this issue have disallowed 401 k loan repayments as means test expenses. The court followed the majority of opinion and ruled that this debtor’s monthly loan repayments to his own 401 k plan is not permissible as an involuntary expense deduction for means test purposes.
The means test permits debtor to deduct on their means test the money they pay each month for transportation. The law provides for a standard transportation expense. The debtor deducts either the standard expense or proven actual expenses. What happens if a debtor owns a car free and clear? Should debtors with no car payments get the same deductions as other debtors with monthly car debt. This court reported that on this issue there is a heavily litigated split among different appellate courts and bankruptcy courts. Our appellate circuit, the 11th Circuit, has not ruled on this issue. After reviewing arguments on either side of the issue this bankruptcy court held that the debtor with a car owned outright may deduct the applicable standard monthly allowance for vehicle ownership cost. The case is In re Michael Koch Case No. 08-29122 from the Souther District of Florida.
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.
Chapter 7 bankruptcy debtors often own cars subject to a car loan and lien. The new bankruptcy law states that debtors must reaffirm loans on all personal property in order to maintain the property through their Chapter 7 bankruptcy. So, debtors who want to keep automobiles must sign a reaffirmation agreement making them personally liable to pay the loan until paid in full. The Chapter 7 bankruptcy discharge will not discharge the debt and will not protect the debtors if they cannot pay the loan after the bankruptcy is closed.
Real property is different. The new bankruptcy law does not expressly require reaffirmation of debts secured by real property such as mortgage debt. Therefore, I have advised my clients not to reaffirm home mortgages in bankruptcy because they were not so required. I did not think debtors should obligate themselves personally on mortgage debt if not legally required to do so. That way, if after their bankruptcy the debtors could not pay the mortgage and had to walk away from their house the mortgage lender could not sue them personally.
A new ruling by an Orlando bankruptcy judged ends the option to "ride through" a mortgage debt. The judge said that if a debtor wants to keep real property after bankruptcy the debtor has to reaffirm their personal obligation to pay the mortgage debt just like they have to do with their cars and other personal property. The judge cited a ruling by the Eleventh Circuit Court of Appeals that debtors mus act to either surrender or reaffirm a debt if the debtor desires to retain the collateral. The judge said the Eleventh Circuit made no distinction between real property and personal property and that no distinction is merited.
As a consequence of this ruling debtors (at least Orlando Division debtors) must reaffirm personal liability for a mortgage if they want to retain their homestead and other real property after a Chapter 7 bankruptcy. If they are not willing to reaffirm the mortgage they must surrender the house to the lender in which event the bankruptcy discharge would shield them from liability. But, you can’t keep the house without accepting the responsibility and risk for future defaults.
Reaffirming a mortgage debt is not a problem in a good or even normal housing market when housing values increase. In today’s real estate market bankruptcy debtors will have to seriously consider the risks of retaining their homestead and other real property since a future default may subject themselves to substantial legal liability. The case is In re Linderman, 09-BK-02087
I saw an interesting post by south Florida banrkuptcy attorney Jordan Bublick. I refer many people living in sourth Florida to Mr. Bublick for bankruptcy. The post, Homestead Held in Revocable Trust, discusses a court decision involing a Chapter 7 debtor who owned his primary residence in a living trust. Many courts in Florida previously held that a home owned by the debtor's living trust qualifies for homestead exemption in bankruptcy. Mr. Bublick reports that thisj judge implied that a Chapter 7 trustee can take over the debtor's rights to amend his living trust and by amending the trust agreement possibly strip homestead protection.
When a debtor files Chapter 7 the Chapter 7 trustee takes over all of the debtor's legal rights and powers. Most living trust agreement reserve to the debtor the right to take property out of trust and the right to amend the trust agreement. A court could find that the debtor's right to amend the trust is not protected by homestead exemptions even if the result of the amendment is to diminish the debtor's homestead rights. In my own opinion, I think this argument would fail because courts very liberally construe homestead protection for the benefit of a debtor's family dependents. In any event, Mr. Bublick makes an interesting point.
Where one spouse files Chapter 7 bankruptcy and same debtor and the non-filing spouse has no joint unsecured debts any property owned jointly by the two spouses as tenants by entireties property is exempt and is not part of the bankruptcy estate. There is no entireties protection to the extent of any joint creditors.
Today I met a married couple who were considering bankruptcy. They were unsure if one spouse should file or if the should file jointly. Each spouse had separate debts; no joint unsecured debts. The spouses jointly owned some real estate free and clear. Even in today’s market the properties had significant value. They knew the general entireties rule from reading my website, and they knew if either spouse filed bankruptcy separately the jointly owned real estate would be exempt. They asked me if the result if different if they both file a joint bankruptcy. They assumed that bankruptcy law would not permit spouses to jointly file bankruptcy and protect jointly owned property with equity. Isn’t the joint bankruptcy filing, they asked, the same as having joint unsecured debts?
I think the entireties property would remain exempt even if both spouses jointly file bankruptcy where they have no joint debts. The entireties would be exempt in this case if the spouses filed separate bankruptcies either concurrently or sequentially. Joint filing for administrative convenience should not change the entireties exemption. Also, outside of bankruptcy court none of the creditors of either spouse could reach the entireties property. I am not aware of any bankruptcy case that dealt with the question posed by these clients.
Another bankruptcy attorney emailed me asking me for my opinion about a case where an Orlando bankruptcy judged permitted a Chapter 7 debtor to "strip" off a second mortgage on their homestead. The law as I understood it was (and is) that only Chapter 13 debtors can use bankruptcy to strip a second mortgage lien off their homestead. The second mortgage is removed when the debtor successfully completes the Chapter 13 assuming that the house value is equal to or less than the first mortgage balance.
I looked up the case the attorney referred to. Sure enough, it was a Chapter 7 bankruptcy, and the judge issued an order stripping a second mortgage from the residence. The judge did not write an opinion explaining the order. There was no objection filed by the second mortgage lender.
I don’t accept this order as precedent. I think the judge’s office made a mistake. The law is clear on this issue. A second mortgage can be stripped only in a Chapter 13 case. That there was not lender objection and no written opinion suggests that this order was entered in error.
If a debtor’s attorney submits an order with a 20 day negative notice (any party has 20 days to object or the order will be granted) , and no party objects, the judge’s office will draft an order approving the motion and present it to the judge for signature. I think in this instance the judge’s office saw an order to strip a second mortgage with a routine negative notice, did not catch the fact that it was a Chapter 7 proceeding, and drafted an order approving the motion for the judge. If the judge understood that this was a Chapter 7 case, the judge would have written an opinion explaining why the mortgage could be stripped from the homestead.
This case may be a windfall for this debtor. Debtors may get in trouble with the court if they try to "slip by" a strip motion in a Chapter 7 bankruptcy.
posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida
I filed Chapter 7 bankruptcy for a relatively wealthy husband and wife. The debtors passed the means test primarily because they had large mortgages on their residence and a few investment properties. Secured mortgage payments provide income offsets in means test calculations. The debtors lived in a nice house, drove nice cars, and the family enjoyed an annual income over $100,000. As expected, the U.S. Trustee filed a notice of a "b(3)" challenge which means that the U.S. Trustee may consider the Chapter 7 bankruptcy to be an abuse. Bankruptcy courts will dismiss a Chapter 7 bankruptcy as an abuse where the debtor is using bankruptcy to sustain a "lavish" lifestyle at the expense of unsecured creditors. Simply stated, your bankruptcy could be in trouble when your house and your car are nicer than the judge’s and trustee’s houses and cars. In this instance, my clients got lucky.
My clients’ had two mortgages on their principal residence including a small first mortgage and a large second mortgage. The U.S. Trustee took my clients’ deposition. During the deposition he asked the clients why they incurred the large second mortgage. The clients testified that they used the proceeds of the large second mortgage to make down payments on their investment properties during the real estate bubble.
The U.S. Trustee concluded from the deposition testimony that the debtors’ debts were primarily non-consumer debts because the large second mortgage on the residence, as well as the mortgages on the debtor’s investment properties, were used for investment purposes. The general rule is that mortgages on your primary residence are consumer debts, not business debts. When a debtor uses a homestead’s second mortgage proceeds for business as opposed to consumer purposes, such as down payment on investment properties, the second mortgage is deemed to be for investment rather than consumer purposes.
A debtor whose debts (secured and unsecured) are primarily non-consumer debts is exempt from the means test in determining eligibility to file Chapter 7 bankruptcy. The U.S. Trustee explained that the non-consumer debt test also applies to the so-called "b(3)" abuse issue. Even when the U.S. Trustee believes a Chapter 7 debtor is living an extravagant lifestyle after filing Chapter 7 bankruptcy the Trustee cannot challenge the filing as an abuse when the debtor’s debts are primarily non-consumer debts.
posted by Jonathan Alper, bankruptcy and asset protection lawyer, Orlando, Florida
When you are thinking about filing bankruptcy it can be very confusing. You may not know where to begin, you have been stressed out about your bills for awhile now. You have been receiving threatening letters in the mail and getting harassing phone calls to your home or cell phone. You are probably already at your wits end and the last thing you want to do is think about your bills some more. However, you will have to do this in order to file bankruptcy in order to determine which way is the best way for you to go. If you are thinking about filing then you will want to learn about Chapter 7.
Chapter 7 will take care of a lot of your debts, but not all of them. It is the best option for you if you have more going out in credit card payments, medical bills, and judgments, then you have coming in and you are needing to keep some of your assets, such as your home. There are a lot of things that are dischargeable under a Chapter 7 bankruptcy which will help you to get rid of that debt and feel as if you have a new lease on life. You will be able to start rebuilding your credit and stop the harassment you have been enduring from bill collectors.
Some of the things that you will be able to discharge under a Chapter 7 bankruptcy are credit card debts, loans, judgments, medical bills, and old income taxes. This can be a huge help to some people and may be all that they need to wipe the entire slate clean. Even if you have some debts that can’t be discharged under Chapter 7, you will want to consider that if most of your debt does get discharged then it may be enough to help you be able to catch up on your other bills.
Some of the things that can’t be discharged under a Chapter 7 bankruptcy are child support, recent taxes, divorce debts, drunk driving debts, student loans, criminal fines, restitution, or fraud debts. These things will still remain on your credit report, although you can have a better chance of working out payments on these once you relieve yourself of your other debts. This will also help your credit rating by paying on these debts and getting them caught up and current on your credit report.
Bankruptcy Attorney Jamie Ryke of the Second Start Bankruptcy Law Firm talks about the Truth about Bankruptcy. Find out how we can help you get out of debt and get a fresh start by filing either a chapter 7 or chapter 13 bankruptcy.
When considering bankruptcy, people want to know what are bankruptcy Chapter 7 exemptions?
First, a person needs to understand that Chapter 7 bankruptcy is known as the liquidation bankruptcy because a debtor’s property that is not exempt is sold and the net proceeds are distributed to the debtor’s creditors. The more property that is exempt, the more property that a debtor can keep after filing bankruptcy.
While bankruptcy is federal law and bankruptcy cases are filed in the federal district court for the area in which the debtor lives, state laws have a big effect on bankruptcy. As part of the federal law, states may determine what property is exempt from a Chapter 7 bankruptcy. Therefore, bankruptcy Chapter 7 exemptions vary state to state. That is the reason you may have heard that a lot of famous wealthy people move to Florida and then file bankruptcy. Apparently, Florida’s exemptions are more generous than other states.
Most states exempt at least a portion of the following:
- Household goods such as furniture, kitchen appliances and utensils, electronics, etc.
- Personal items and property such as clothing, jewelry, etc.
- Health aids.
- Tools of a person’s trade.
- Automobiles and vehicles.
- Homes used as the debtor’s primary residence.
- Pensions.
Generally, the way that a portion of property is exempt is that dollar values are used. For example, a state law may say that $2,000 of a car’s value is exempt and that the exemption is applied to the equity that a person has in the property. If there is a loan on the car, the exempt amount is applied to the amount of equity that the debtor has in the car. In our example, if the car is worth $5,000 with a loan balance of $3,000, then there is $2,000 in equity. If the exemption is $2,000, then the car is exempt from the bankruptcy ($2,000 equity less $2,000 exemption) and the debtor may keep the car as long as the debtor pays off the car loan.
To determine exactly what property is exempt, you need to look at your state’s laws. Information that you find on the internet may or may not be accurate. The best way to learn what property is exempt is to contact a lawyer.
This is only general information. If you need specific information or have any questions of any nature whatsoever, talk with a lawyer licensed in your state.
This article may be republished, but the wording must not be changed and the author links must remain active.
Stop! Did you know that bankruptcy was created to give people a fresh start? Find out more at bankruptcy information. And click here for more insights on Chapter 7 bankruptcy.
I have been representing debtors in bankruptcy cases filed in the Northern District of Georgia for over 20 years. Until the law changed in 2005, filing bankruptcy was a fairly straightforward process – often I would meet with a client, decide whether to file and select Chapter 7 or Chapter 13, collect information about creditors, develop a budget, then file that day.
