Archive for the ‘Court Decisions’ Category
Wednesday, February 3rd, 2010
You’re unemployed. You’re poor. You are stressed-out by debts and debt collectors. So, you file Chapter 7 bankruptcy. Then, shortly after you file bankruptcy you find a job. Not just "a job" but a really good job that pays high salaries. All of sudden you have money. In fact, you make so much money that you could afford to pay back most of your debts if you were in a payment plan. What happens to your Chapter 7 bankruptcy? Can you continue to wipe out all your debts even though you were fortunate enough to find a new, high paying job.
The question was discussed in a recent Florida bankruptcy court decision. A United States Trustee argued that granting a Chapter 7 discharge would be an abuse of Chapter 7 where the debtor was unemployed on the petition date, but thereafter obtained employment that enabled him, post-petition, to deposit more than $1,000 cash flow in a 401k account. The U.S. Trustee argued that the debtor’s new job enabled him to pay at least $668 per month to creditors if his Chapter 7 were converted to Chapter 13. Is it an abuse to let this debtor keep all his new income and pay no debts because he filed Chapter 7 bankruptcy?
The bankruptcy court did not dismiss the case. The court said that the post-petition job and ability to pay creditors is relevant to an abuse analysis, but that the U.S. Trustee most show more than just the debtor’s mathematical ability to pay debt from his new job. The court noted, among other things, that this debtor did not improve his living standards after his employment and that he has a serious medical condition that will limit his working life. The bankruptcy was a result of an unexpected, sudden job joss. The court held that it must consider all circumstances and not just the "mere mathematical ability to fund a Chapter 13 plan." In re Lavin, Case No. 08-2708, Tampa Division.
Posted in Court Decisions | Comments Off
Wednesday, January 6th, 2010
The Eleventh Circuit Court of Appeals issued an interesting decision about exemption of self-employed businessmen’s pension plans. A self-employed Florida debtor filed Chapter 7 bankruptcy listing her Keogh plan as an exempt asset. Section 222.21 of the Florida statutes exempts debtors’ retirement plans. The Chapter 7 trustee objected to the exemption of the debtor’s Keogh retirement plan. The bankruptcy court concluded that the debtor could not claim the exemption, and that the debtor’s Keogh plan was part of the bankruptcy estate, because the debtor was the "sole shareholder and sole participant" in the Keogh plan. The debtor appealed to a local District Court which upheld the bankruptcy court’s result on the grounds that the the debtor’s Keogh plan was not and ERISA plan.
The appeals court reversed the lower courts and sustained the Keogh objection. The appellate court found that Section 222.21, Florida Statutes exempts all pensions sanctioned under Section 401(a) of the Internal Revenue Code. The court said that an "employee" in Section 401(a) includes a "self-employed individual." Then, the appeals court stated that in 2005 the Florida Legislature amended Section 222.21 to provide that an exempt pension does have to comply with ERISA. Therefore, the single-member Keogh plan is exempt even though it is not an ERISA sanctioned retirement plan. In re Sarah E. Baker 11th Circuit, Case No. 09-13144.
Posted in Court Decisions | Comments Off
Monday, December 7th, 2009
I received a copy of an interesting bankruptcy court order from Jordan Bublick, a Miami bankruptcy attorney. Mr. Bublick’s debtor filed a Chapter 13 bankruptcy. The debtor had three separate loans with a large bank. Each loan was for a different amount and terms. All three loans were secured by a single junior mortgage on the debtor’s principal residence. The creditor filed three separate claims, one for each loan.
Bankruptcy law allows Chapter 13 debtors to "strip" any mortgage on a primary residence that is wholly unsecured. In this instance, there was enough equity after considering the purchase money first mortgage to cover the amount of one of the bank’s three loans. Mr. Bublick filed a motion to strip the junior mortgage and modify the claims. The bank responded that because all three loans were secured by one mortgage, and at least part of the total loan amount was secured by that mortgage, the debtor could not modify the claims nor strip the mortgage lien from the personal residence.
The bankruptcy court held that even though the bank secured the debts with a single mortgage the loans and the banks claims were separate obligations. The court found that there was sufficient home equity to secure one of the three bank loans. The court stated the debtor could avoid the mortgage to the extent of two claims which exceeded the home value. Pursuant to to the Bankruptcy Code’s definition of "claim" as a right to payment, the bank holds three separate obligations in form and substance under Florida law notwithstanding the single mortgage security. The case is 09-12578-BKC-LMI
Posted in Court Decisions | Comments Off
Monday, December 7th, 2009
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.
Posted in Chapter 7, Court Decisions | Comments Off
Sunday, November 29th, 2009
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
Posted in Chapter 7, Court Decisions | Comments Off
Friday, November 27th, 2009
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.
Posted in Court Decisions | Comments Off
Thursday, November 19th, 2009
Chapter 13 bankruptcy law permits debtors to "cram down" some secured debts. You can cram down secured car loans originated more than 910 days prior to bankruptcy, and you can cram down mortgages on investment real estate. No cram downs allowed for your primary residence. Here’s how it works. Suppose you bought an investment property with cash and a $250,000 mortgage. The property today is worth $100,000. In a Chapter 13 bankruptcy the owner (debtor) can cram down the mortgage to the current property value, $100,000, leaving the debtor with a "bifurcated" debt consisting of $100,000 secured debt and $150,000 unsecured debt owed to the mortgage lender. The unsecured portion of the original mortgage is treated together with the debtor’s credit card debt and other unsecured debts, and any part of the now unsecured $150,000 mortgage loan not paid during the five year bankruptcy plan is discharged at the end of five years (Chapter 13 plans five years max). Here’s the catch. Bankruptcy law requires the Chapter 13 debtor to pay the entire cram-down secured debt ($100,000) during the term of the plan. Paying down the secured part of a relatively small car loan in five years is usually doable, but paying a cram-down mortgage debt, in this example $100,000, in a five year plan can be a big problem for someone whose financial situation has caused them to declare bankruptcy.
One debtor and his attorney came up with a creative cram down plan in a Chapter 13 bankruptcy filed in our Orlando court. The debtor’s plan proposed that during the initial 59 months of his 60 month plan the debtor would make small monthly payments toward a cram-down mortgage secured by the debtor’s investment property. The plan provided for a large balloon payoff of the allowed secured claim at the end of the plan. This plan provided the debtor with affordable plan payments for four years, eleven months during which time he could hopefully qualify to refinance the allowed mortgage balance at the end of the plan.. The mortgage lender objected to this payback arrangement and brought the issue before the bankruptcy court.
The mortgage lender argued that the bankruptcy law requires Chapter 13 debtors to make equal payments toward a cram-down secured debt throughout a five year bankruptcy plan. The debtor responded that the Code requires the cram-down debt be paid during the five year plan without condition- there is no requirement of equal payments and no prohibition of a balloon at the end of the plan. The bankruptcy judge ruled in the debtor’s favor. The judge said that a Chapter 13 plan may provide unequal payments of a cram-down secured debt even if the plan includes a large balloon payment at the end. The judge ruled that the plan must include sufficient interest on the secured debt to make sure that the creditor receives a total amount during the plan, including the balloon, equal in value to what the creditor would have received if the allowed secured debt were paid in full at the beginning of the Chapter 13.
This court’s interpretation provides debtors opportunity to save property in a Chapter 13 where the debtor is eligible to cram down the secured debt. The case is In re Cooper 6:08-11960Download Cooper Order
Posted in Court Decisions | Comments Off
