Archive for the ‘Chapter 7’ Category
Wednesday, February 9th, 2011
The bankruptcy law provides that any money a debtor receives by “bequest, devise, or inheritance” within the six months after a case is filed becomes part of the bankruptcy estate and is paid out to the creditors. I read about a bankruptcy cased decided late last year dealing with money a debtor received from a parent’s living trust after the parent died. The issues was whether a trust bequest is within the definition of a “bequest, devise or inheritance” so that the trustee can claim the money.
The bankruptcy court thoroughly analyzed and discussed the technical meaning of the terms bequest, devise, and inheritance under Florida law. Summarizing ,the court found that the terms bequest and devise mean the same thing, and that is, a testamentary disposition of real or personal property under a will. The term “I inheritance is not well defined under our laws, but the court found that its best meaning is the receipt of property form an ancestor under laws of intestacy.
A living trust is set up during the life of the parent (ancestor) and the parent, or trustmaker, gives the beneficiaries a contingent future interest while the trustmaker is alive. The court recognized that a typical living trust has a testamentary aspect and intent because it makes provisions for dispositions of property to children after the trustmaker’s death. However, the court said that the living trust’s testamentary aspects do not make the transfer a testamentary transfer.
This court concluded that money and property a bankruptcy debtor receives from a living trust within 180 days of filing is not captured by the bankruptcy trustee or the estate as a “bequest, devise or an inheritance.”
The judge’s holding requires a strict reading of the applicable legal terms as indicated above. In my opinion, the statute intends the include in the bankruptcy estate all types of windfalls a debtor receives by virtue of the death of a family member within the 180 day period. I suspect that another bankruptcy court may reach a decision less favorable to the debtor.
In re Rogove Case No 09-24622
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Thursday, January 13th, 2011
Too many people do not understand the “business debt” exemption from the means test. It seems that there is a consensus understanding among attorneys, bankruptcy attorneys and others too, that a prospective debtor is exempt from the means test if he has business debts in excess of his credit card, mortgage, car and other consumer debt. That is not exactly correct.
I spoke with a potential bankruptcy client who said that two attorneys told him he could not file bankruptcy because his income was too high. Last year, this debtor and his spouse earned $385,000.00. He owned about $125,000 in credit card debts and had two home mortgages and car loan totaling about $600,000. The debtor also owned three rental homes with mortgages totaling $450,000. He wanted to walk away from the houses and discharge the mortgage debts. The rental real estate mortgages were his only “business debt.” Two attorneys advised him that he was ineligible to file Chapter 7 bankruptcy because of his relatively high income and because his consumer debts of $725,000 ( credit cards, home mortgage, car loans) exceeded his “business debt” of $450,000. The debtor and his spouse also owed the IRS approximately $400,000 of personal income taxes for taxes due over the past five years.
This debtor should be able to file Chapter 7 in spite of his $385,000 income. The means test exception does not compare consumer debts and business debts; the test compares consumer debts and non-consumer debts. This debtor’s non-consumer debt includes his rental home mortgages of $450,000 and his tax debts of $400,000. His non-consumer debts exceeds his consumer debts, and therefore, the means test is not applicable. It so happens that the debtor cannot discharge most of his IRS debts. However, he can consider Chapter 7 bankruptcy even if he has a high taxable income.
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Wednesday, December 22nd, 2010
Bankruptcy trustees will target debtor’s income tax refunds. Tax refunds provide immediate cash available for distribution to creditors as opposed to other assets, such as cars, which have to be stored, noticed for sale, and liquidated at auction with commissions due.
One of my bankruptcy clients is expecting a significant tax refund. He stated that all his income in the past year was in the form of distributions from a qualified pension plan and social security. Proceed from pensions and social security distributions are exempt under Florida law after they money has been distributed to the recipient debtor. My client wants to know if his tax refund representing taxes withheld from pension and social security distributions is exempt in Chapter 7 bankruptcy.
I have never seen a case on this issue, and the issue has not come up before in any of my previous bankruptcy cases. In my opinion, the tax refund would not be exempt. Money from pensions and social security in a debtor’s financial account is exempt only if the debtor can trace the funds in his financial account to pension or social security distributions. It is difficult for a debtor to trace pension and social security funds after the money has been commingled with money received from non-exempt sources. The debtor’s tax refund has been commingled with other money in the U.S. treasury. The IRS does not keep each taxpayer’s tax withholding in a segregated account such that the withheld funds could be traced to their source, and therefore the money the debtor receives as a tax refund is not the same money withheld from his pension and social security. Because the tax refund money cannot be traced to this debtor’s social security and pension distributions the refund should be part of the non-exempt bankruptcy estate.
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Tuesday, December 7th, 2010
How much is my car worth? This a question asked by most bankruptcy debtor’s who plan to file Chapter 7 and own a car free and clear of any liens. Florida law exempts only $1,000 of car equity in most cases, and cars’ liquidity makes them a prime target of Chapter 7 trustees who seek to recover non-exempt assets for creditors.
My own clients have suggested many methods they intend to use to value their own non-exempt cars. Example valuation standards are: written appraisals from their personal used car “guy”; an average of the car’s wholesale and retail values; the bid they get at Carmax, the Blue Book etc. This past Tuesday I was at a creditors meeting and I asked a bankruptcy trustee how she, and other trustees she speaks with, determine the value of debtor’s automobiles. She said that most trustees she has spoken with use the “trade-in” or in the yellow NADA book. That’s the book the banks use for car lending. She said that some trustees use “loan value” which is close to the “trade in” value. Carmax provides the lowest valuation based on auction wholesale price.
If you plan to take a car through bankruptcy make sure you are “on the same page” and in the same value book as your bankruptcy trustees.
Secondly, if there is something wrong with your car you need to adjust the car value and tell the trustee at the creditors meeting. One of my recent clients told me his car was worth $4,000 based on NADA value. The trustee made him buy back $3,000. After the creditor meeting the client told me that, “oh, by the way” the car air conditioner had been broken for some time and required a $2,000 repair. That fact, if known before the trustee meeting, probably would have removed the car as an issue. Now, the client is facing a difficult task of explaining why he believes his car is worth $2,000 when he swore on his bankruptcy petition it was worth $4,000.
Your bankruptcy attorney is not going to perform a mechanical inspection of your car and is not an expert on car values. Anything that could lower your car’s value must be considered before you sign your bankruptcy petition.
Posted in Chapter 7, Planning Tips | Comments Off
Tuesday, December 7th, 2010
How much is my car worth? This a question asked by most bankruptcy debtor’s who plan to file Chapter 7 and own a car free and clear of any liens. Florida law exempts only $1,000 of car equity in most cases, and cars’ liquidity makes them a prime target of Chapter 7 trustees who seek to recover non-exempt assets for creditors.
My own clients have suggested many methods they intend to use to value their own non-exempt cars. Example valuation standards are: written appraisals from their personal used car “guy”; an average of the car’s wholesale and retail values; the bid they get at Carmax, the Blue Book etc. This past Tuesday I was at a creditors meeting and I asked a bankruptcy trustee how she, and other trustees she speaks with, determine the value of debtor’s automobiles. She said that most trustees she has spoken with use the “trade-in” or in the yellow NADA book. That’s the book the banks use for car lending. She said that some trustees use “loan value” which is close to the “trade in” value. Carmax provides the lowest valuation based on auction wholesale price.
If you plan to take a car through bankruptcy make sure you are “on the same page” and in the same value book as your bankruptcy trustees.
Secondly, if there is something wrong with your car you need to adjust the car value and tell the trustee at the creditors meeting. One of my recent clients told me his car was worth $4,000 based on NADA value. The trustee made him buy back $3,000. After the creditor meeting the client told me that, “oh, by the way” the car air conditioner had been broken for some time and required a $2,000 repair. That fact, if known before the trustee meeting, probably would have removed the car as an issue. Now, the client is facing a difficult task of explaining why he believes his car is worth $2,000 when he swore on his bankruptcy petition it was worth $4,000.
Your bankruptcy attorney is not going to perform a mechanical inspection of your car and is not an expert on car values. Anything that could lower your car’s value must be considered before you sign your bankruptcy petition.
Posted in Chapter 7, Planning Tips | Comments Off
Friday, December 3rd, 2010
People who become recently unemployed can usually file chapter 7 bankruptcy. I have written previously that people who technically fail the means test may still be permitted to file bankruptcy if unemployed under “special circumstances” provision of the means test law. The length of the debtor’s unemployment prior to filing can make a big difference.
I spoke to a prospective bankruptcy debtor who had been making $8,000 per month in a two-person household. She could not pass the means test at that salary level. Assume the debtor lost his job six months ago. In that case the debtor could file bankruptcy whatever his prior salary because the means test only looks back six months. If that debtor found a new job prior to filing where the debtor made $8,000 or even more money the debtor could still file Chapter 7 because he likely would not have made enough money from the new job, whatever the salary, to raise his six month’s income above median income.
Suppose, on the other hand, the debtor became unemployed just one or two months ago. At $8,000 per month his salary during just four of the six months prior to bankruptcy would still be too much to pass the means test. However, his current unemployment may constitute a special circumstance to permit filing because he would be without prospective income. In this situation, a new job prior to filing bankruptcy would probably prevent a chapter 7 bankruptcy because he would not have unemployment as a special circumstance.
The high income debtor with six months unemployment can search for a new job immediately without jeopardizing chapter 7 eligibility, whereas the more recently unemployed high income debtor cannot accept employment at least until after he has filed his petition. I would advise the recently unemployed debtor to wait until after his trustee meeting for new employment. Even though a new started after the filing a trustee could seek to challenge the bankruptcy as abusive if the trustee hears that the debtor is again making a relatively high income.
Posted in Chapter 7, Means Test | Comments Off
Sunday, November 21st, 2010
A prospective Chapter 7 bankruptcy debtor receives significant monthly disability insurance proceeds as a result of a disabling medical condition. He wanted to know how his disability checks would affect a bankruptcy. There are two issues with disability income. The first question is whether disability income is counted in the means test and second is whether disability money held in a bank account is part of the bankruptcy estate controlled by the trustee.
Social security disability does not count as income for purposes of Chapter 7 bankruptcy eligibility. Social security disability does not count when determining if the debtor is above or below median income, and if above median income, it is not income in the means test. Disability income under a private disability insurance contract is counted as debtor income. Medical expenses related to this debtor’s medical condition that caused the disability would be deductible in the means test to offset the insurance income.
All disability proceeds, social security or private insurance, is exempt under Florida statutes. Florida courts usually hold that disability income, as well as pension and retirement income, retains exempt status after it is deposited in a financial account as long as it is traceable. Disability income retained in this debtor’s bank account could be claimed as exempt.
Posted in Chapter 7, Client Questions | Comments Off
Tuesday, November 16th, 2010
A reader emailed me a question about how mortgage protection insurance is treated in the means test. The reader had a mortgage insurance policy that paid his monthly mortgage payments in the even he lost his job. The insurance covered payments for a number of months after which payments stopped. This reader found himself out of work and wanted to file Chapter 7 bankruptcy. He wanted to know if the money the mortgage insurance company paid to his mortgage lender would count as income for means test purposes.
I have never encountered this issue in any of my cases. My understanding is that insurance proceeds are “income” if the insurance is designed to replace or supplement lost income. Unemployment insurance, for example, is income for means test purposes. The mortgage insurance policy appears to have been designed to replace the debtor’s income temporarily in event of a job loss. For that reason, I think the insurance payments should be treated as income for Chapter 7 qualification.
The income is temporary income. If the mortgage insurance payments will cease within a reasonable time after the debtor files Chapter 7 I think the debtor would be permitted to file Chapter 7 regardless of means test result because it would be obvious that he will have no income at a time certain. The means test includes a “special circumstances” provision to account for debtor’s who face financial hardship which is not considered in the means test formula.
Posted in Chapter 7, Client Questions | Comments Off
Friday, November 5th, 2010
Motions for relief from stay filed by mortgage lenders are usually a formality when the Chapter 7 debtor intends to walk away from the property and the property has no equity. The debtor typically does not contest the bank’s motion and the trustee typically takes no position. Things are changing.
At least one of our trustees has been objecting to the mortgage lender’s stay relief motions when the originating lender has assigned the mortgage to an investor. The trustee is asserting mortgage foreclosure defenses associated with the mortgage assignment including, for example, that the assignment documents were not properly executed or that there is a break in the chain of ownership of the mortgage. If the trustee can show any defect in the assignment of the mortgage to the current mortgage holder the trustee’s bankruptcy lien would gain priority over the party asserting title to the mortgage. Then, the trustee could liquidate the property and wipe out the mortgage.
At a minimum, the trustee’s ability to assert a viable objection to the chain of mortgage title would force the bank to pay money to settle the trustee’s claim. Trustees are paid on commission so they and the creditors gain if they could force the bank to pay money to defend its mortgage ownership.
The mortgage lenders involved in these cases may say that trustee is trying to extort a settlement by objecting to the mortgage stay relief. So what? Our legal system is full of claims filed to extort money from deep pocket defendants, and I don’t blame a trustee for getting in on the action. Plus, the trustee’s objections are creative and the “extortion proceeds” would go primarily to other creditors.
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Monday, October 11th, 2010
The Case Ransom v. MNBA appeared before the Supreme Court last week and raised interesting questions about the role of the means test bankruptcy filers must pass in order to qualify for protection under Chapter 7 of the U.S. Bankruptcy Code. Here's a look at what's involved in the case and what it might mean for future bankruptcy filers.
Car Payments and Income in the Means Test
The court case involves the bankruptcy petition of man named Jason Ransom.
- No car loan: Sources note that Ransom has a car that he owns fully – that is, he is no longer making payments on the vehicle.
- Ownership deduction: In his bankruptcy petition, Ransom reportedly claimed an ownership deduction of $471 per month for his vehicle.
- Court rejection: Because he had no car payment, though, the bankruptcy court rejected this deduction in his initial case filing. An appellate court upheld the decision. The Supreme Court must make a final decision.
- IRS definition: Apparently, both the district court and the appellate court denied Ransom's deduction claim based on the Internal Revenue Service's definition of an allowable deduction for car owners, which limits such deductions to people who are currently making payments on their vehicles.
So the issue at hand is whether or not a Chapter 13 filer (that is, a bankruptcy petitioner who has above-median-income levels and so does not pass the Chapter 7 means test) can keep money each month (instead of paying it to creditors) under the car ownership deduction if he or she is not currently making payments on a car.
Why It Matters: Your Money in Chapter 13 Bankruptcy
The issue may sound fuzzy, but the Supreme Court's decision could have real impact on future bankruptcy cases. Here's a look at why and how.
- The language of the Bankruptcy Code: While the language of the U.S. tax code is clear that an ownership deduction is only available to those still making payments on a vehicle, the language of the U.S. Bankruptcy Code is a bit fuzzier.
- The cost of owning a car: As Ransom's lawyers are reportedly arguing, the "ownership deduction" should be available to those who own their cars outright because such vehicles require maintenance and repairs – especially if they're older.
- The expensive car loan argument: One of the reasons that this issue is so interesting is because it essentially rewards people who have expensive car loans and newer cars and punishes those who are (perhaps more fiscally responsibly) driving older vehicles they've already paid for.
- The freedom of extra money: If the Supreme Court decides to grant the ownership deduction to people who own their cars outright, it could mean greater financial independence for car owners who file for bankruptcy. Because they'd be able to save more money each month, they could potentially catch up on other payments more easily and possibly even build savings, thus preparing themselves more fully for post-bankruptcy life.
Posted in Bankruptcy Courts, Bankruptcy Filing Requirements, Bankruptcy Law, Bankruptcy News and Events, Chapter 13, Chapter 7, Means Test, Supreme Court | Comments Off
