Archive for the ‘Court Decisions’ Category
Wednesday, November 10th, 2010
People with significant real estate investments have trouble qualifying for Chapter 13 bankruptcy because of Chapter 13 debt limits. Debtors cannot file bankruptcy if their secured debts exceed approximately $1 million or if their unsecured debt exceeds about $330,000. I read a case about a client with several million dollars real estate mortgages who came up with a creative plan to squeeze himself into a Chapter 13 bankruptcy.
The debtor’s petition stated that he intended to surrender all of the secured real property leaving him with no secured debt. Problem was that all the real estate was “upside down” so the surrender and resulting foreclosure would subject the debtor to large unsecured deficiency claims totaling far more than the $330,000 unsecured debt ceiling. So, the debtor argued that because amount of the deficiency claims was undetermined, that is unliquidated, at the time he filed his petition these unliquidated claims could not be computed and assessed against the unsecured debt ceiling.
Nice try, but no cigar. The bankruptcy court ruled that the majority view on this issues is that uncertainty regarding the amount of a debt is insufficient to render the claim contingent or unliquidated for the sole purpose of determining the Chapter 13 debt limits. In re Hinds 09-23764, Southern District Florida
Posted in Chapter 13, Court Decisions | Comments Off
Friday, October 22nd, 2010
Parents often set up their own checking accounts with a “pay on death” instruction so that when they die the account will automatically transfer to their child without probate. The bankruptcy law state that any property you inherit within six months of filing Chapter 7 bankruptcy is drawn into your bankruptcy estate and paid to your creditors. This week I had a new bankruptcy client who was named on their parents’s POD account, and we discussed what would happen to their parent’s money if their parents died soon after this client filed Chapter 7.
Although I have never encountered a case where a debtor received a post-filing POD account, I do not think such account would be part of the bankruptcy estate because the child would not have acquired the money as part of an inheritance. The parents would have conveyed to the child during the parents’ lifetime a revocable future interest in the account. Technically, the debtor’s future interest, although subject to revocation, is the debtor’s asset at the time they file. A parents’ POD account would be difficult to administer in a child’s bankruptcy because the value of a revocable future interest is difficult to determine, and if the trustee made a claim against the POD interest the parent would revoke it.
In my opinion, if a debtor acquires a future interest in their parents’ asset before filing bankruptcy, and receives the asset after filing, the asset has not been acquired as part of an inheritance subject to inclusion in the bankruptcy estate within six months. Some creditors and trustees may have a different opinion. I have not researched whether a bankruptcy court somewhere has dealt with this issue.
Posted in Court Decisions | Comments Off
Thursday, October 7th, 2010
Generally speaking it is difficult, almost impossible, to discharge a student loan in bankruptcy. The debtor has to show “undue hardship”, and if you are physically able to go to work you will have difficulty showing undue hardship. Except that a few years ago one Arizona debtor was able to discharge part of his student loans in a Chapter 13 case.
Here’s what happened. The debtor put his student loan in a five year Chapter 13 plan. The student loan lender received notice of the plan in the normal course of the bankruptcy. The student loan lender did not object to the plan. After the debtor completed his Chapter 13 and the court issued a discharge order the student loan lender went after the debtor’s income tax refunds to collect the student loan. The creditor claimed that the debtor could not discharge any part of the student loan unless he filed a separate adversary complaint within the bankruptcy proceeding alleging undue hardship.
The bankruptcy court said the balance of the debtor’s student loan was discharged even though the debtor neither claimed nor proved undue hardship in the bankruptcy case. The court said that the lender cannot collect the student loan after the Chapter 13 discharge because the lender had proper notice and never objected to the debtor’s plan.
Although you cannot assume your student loan lender will similarly fail to scrutinize your own Chapter 13 plan, this case suggests that it may make sense to include student loans in a Chapter 13 plan. The same result will not apply to Chapter 7 where creditors with non-dischargeable loans do not have to intervene in order to protect their rights after the Chapter 7 discharge. See,
553 F 3d 1193
Posted in Court Decisions | Comments Off
Monday, October 4th, 2010
If you file bankruptcy and want to keep your car subject to a car loan you have to sign a reaffirmation agreement with the car lender wherein you agree to remain personally liable if you fail to make the payment in the future after your bankruptcy is over. Reaffirmation of car debt is an express requirement in the bankruptcy law. The bankruptcy law does not similarly refer to an obligation to reaffirm a secured debt, such as your home mortgage.
Absent the specific requirement to reaffirm secured loans most bankruptcy debtors refused to sign reaffirmation agreements with mortgage lenders. The listed the mortgage on their bankruptcy schedules to discharge personal liability under the mortgage note while they continued making their mortgage payment. That way, the debtors could stay in their house if they continued making mortgage payments after bankruptcy, but if the debtor’s had future money problems they could walk away from the house and be protected from personal liability because their bankruptcy had already wiped out their personal liability. This was not a problem in the past when housing values were increasing, but the issue became more important when values crashed. When mortgages were no longer secured by underlying value the homeowner’s personal liability became more of a concern.
In 2009, a Florida bankruptcy court required homeowners to sign a reaffirmation agreement tendered by their mortgage lender if the debtor wanted to stay in their house. The court acknowledges that bankruptcy courts around the country differ on this issue, but the court concludes that the law in the 11th Circuit, including Florida, requires reaffirmation of all debts including mortgages. The result is that if you file Chapter 7 and want to keep your house you also may have to commit to future personal liability for the mortgage debt. 2009 WL 3625386
Posted in Chapter 7, Court Decisions | Comments Off
Monday, September 27th, 2010
The general rule is that any property a debtor acquires after he files his bankruptcy petition is not part of his bankruptcy estate. The biggest exception to the general rule is money received as part of an inheritance or life insurance policy. All property the debtor receives by “bequest, devise, or inheritance:” or as a beneficiary of someone’s life insurance within 180 days after the filing date becomes part of the bankruptcy estate and is taken to pay the bankruptcy creditors. The debtor gets any part of the inheritance or insurance proceeds remaining, if any, after the creditors are paid.
I assumed it did not make a difference if the debtor’s inheritance of his parent or grandparent’s money was through the probate of a will as opposed to the administration of a living trust. In the past few decades the living trust has become the primary tool to pass on an inheritance because it avoids probate. I saw a 2010 bankruptcy case that indicates that “inheritances” from a living trust are not included in the above referenced bankruptcy definition of “bequest, devise, or inheritance.” In other words, the case finds that when a debtor becomes entitled to money left by a deceased ancestor though the terms of a living trust the debtor’s recovery is not part of the bankruptcy estate. Apparently, several bankruptcy courts around the country have held that when a debtor becomes entitled to assets in a living trust after someone’s death the debtor’s interest was acquired by the trustmaker’s gift during the trustmaker’s lifetime as opposed to being acquired after death.
I would agree with the court analysis if the ancestor had made a lifetime gift to an irrevocable trust because the debtor/beneficiary’s interest would vest during the ancestor’s lifetime rather than upon his death, or if the ancestor’s revocable trust left the debtor an inheritance subject to a valid spendthrift provision which provisions protect money from the beneficiary’s creditors. This bankruptcy court refers decisions of other bankruptcy courts with broader holdings that, for example, payments made to a debtor from inter vivos trust within 180 days of filing are not interests by what of bequest, devise, or inheritance and that such words do not encompass a revocable living trust. In my opinion living trusts are essentially will and probate substitutes, and without spendthrift protection, their beneficiary interests vested in the debtor within 180 days should be included in the debtor’s bankruptcy. Case No.10-30571 Northern District of Florida, August 6, 2010..
Posted in Court Decisions | Comments Off
Wednesday, September 22nd, 2010
All bankruptcy attorneys at one time or another meet clients who suggest transfers of assets to their family or friends in order to hide the assets from a future bankruptcy. These conversations put the attorney in a delicate position. Certainly, the attorney cannot file the debtor’s bankruptcy after discussions about possible bankruptcy fraud. Sometimes the attorney can get in trouble assisting pre-bankruptcy transfers even when the client files bankruptcy later with a different attorney in a different jurisdiction. A recent court case dealt with an attorney who may have crossed the line and got himself in trouble with the bankruptcy court.
In this case, a client met with the attorney to discuss pre-bankruptcy planning. The clients revealed a plan to sell or encumber non-exempt assets to family members, then move to Florida and file bankruptcy, and after the bankruptcy move back to their home state and get the assets back from their parents. For example, one part of the scheme was for the debtor to give his father cash, have the father give the cash to a family friend, have the friend “loan” the cash back to the debtor, and have the debtor pledge non-exempt stock to repay the loan. A total sham. The attorney wrote letters and notes describing the proposed fraudulent transactions and clearly warning the clients not to implement their plan. The attorney stated that although the transactions are legal in their own right, filing bankruptcy without disclosing accurately the transfers would be bankruptcy fraud. His letter to the clients warned the clients not to engage in the bankruptcy plan.
The same attorney, however, assisted the client by drafting the documents for the same above-described loan and stock pledge. The clients moved to Florida and filed bankruptcy with a different attorney. The case reached the courts on a bankruptcy fraud case involving, among other things, issues of attorney-client privilege. The court admonished the planning attorney by helping his clients in “parking assets with close family.” The court stated that there, “is also a reasonable likelihood that (the attorney) either knew or was willfully blind to the fact that his clients were entering sham transactions....”
Perhaps, the attorney thought he was covering his liability by writing letters describing in detail the clients planning fraud and then advising the clients not to implement the plan. To me, and I think to the court as well, the attorney’s memo looked like a roadmap for the client’s bankruptcy fraud with a “don’t do it” attached in the conclusion. When the attorney actually assisted with the documents and transactions he advised against in his own memo he really crossed the line.
Attorneys love to write, and attorneys think they are protecting themselves when they document what bad things they told clients to avoid doing. In this case, I think this attorney would have been better off writing nothing to his clients. The attorney’s detailed letters documented that the attorney knew what his clients were planning and made it look like the attorney was the architect of the plan. Then, after describing the bankruptcy fraud in his letter the attorney helped, even if in a minor way, to implement the plan. I’m not suggesting the attorney should have kicked these guys out of his office; explaining the law and the legal problems with clients’ pre-bankruptcy schemes usually stops the plan and helps the client. But, when the clients seem intent on pursuing games with the bankruptcy court the attorney cannot play on the clients’ team. It’s common sense. See 609 F. 3d 9009
Posted in Court Decisions | Comments Off
Monday, September 6th, 2010
A Chapter 13 debtor has the right to convert to dismiss his Chapter 13 case or to convert the case to Chapter 7 at any time provided he acts in good faith. The court will dismiss a Chapter 13 case if the debtor fails to make timely plan payments. When a Chapter 13 case is dismissed the Chapter 13 trustee may be holding money from the debtor’s previous plan payment which money the Chapter 13 trustee has not yet distributed to the creditors. The Chapter 13 trustee is supposed to return the money to the debtor after the dismissal. The debtor is then left to fend for himself against his creditors without the protection of the bankruptcy stay. That’s how it usually works.
A judgment creditor tried something different in a recent Chapter 13 case in the Orlando Division. A Chapter 13 debtor was unable to keep up with plan payments, and the court issued an order dismissing the Chapter 13 bankruptcy. After the order, the debtor filed a notice of conversion to Chapter 7, and the court converted the case to Chapter 7 immediately thereafter. In between the time the court issued the order of dismissal and the time the debtor filed his notice of conversion the judgment creditor obtained a state court writ of garnishment against the Chapter 13 trustee. The creditor argued that it was entitled to garnish all the money the Chapter 13 trustee was ordered to pay the debtor.
The bankruptcy court upheld the garnishment against the trustee. This one creditor got all the debtor’s money. In practice, creditors are not usually this aggressive in bankruptcy cases. Most creditors do not that quickly. However, as word of this opinion spreads among the creditor community other creditors with judgments may closely monitor dismissals of Chapter 13 cases and attempt similar garnishments.
If a debtor intends to convert a dismissed Chapter 13 to a Chapter 7 case he most do so promptly. The best practice is to file notice of conversion before the court enters the dismissal order so the court will order the conversion rather than order funds payable to the debtor which funds could be subject to garnishment. The case is In re Fisher, 09-07498.
Posted in Court Decisions | Comments Off
Thursday, July 22nd, 2010
Debtor owns an appreciating asset- land, a business etc.- and files a Chapter 7 bankruptcy petition which assigns a low value to the asset which value is below the debtor’s exemption limits. The trustee does not challenge the value or the exemption within the trustee’s 30 day objection window. After the filing, and after the time for the trustee’s exemption challenge, the asset significantly increases in value. Is the debtor "home free", or can the trustee go after the appreciated asset?
This issue was addressed by the U.S. Supreme Court in a cased decided in June. The Court held that the bankruptcy trustee could pursue an asset that appreciates after the petition filing. I read an excellent summary of this case in a blog post by Georgia bankruptcy attorney Jonathan Ginsberg. The post suggests that debtors with potentially appreciating assets might "claim an exemption for ‘full fair market value’ or 100% fair market value’". This valuation might cover anticipated appreciation so that the trustee would have to appraise the asset and challenge the exemption within 30 days of the creditor meeting. On the other hand, using "fair market value" instead of a current number may invite attention to an asset that otherwise would pass through the bankruptcy even if it did appreciate after filing.
The best course of action will become clear after some cases apply the new Supreme Court ruling.
Posted in Court Decisions | Comments Off
Sunday, May 23rd, 2010
There is a general bankruptcy rule that bankruptcy courts have world-wide jurisdiction. This principal is relevant usually when a bankruptcy trustee want to capture the debtor’s assets located in other states and offshore. But, what is the extent of bankruptcy court’s ability to enforce other orders outside the United States? I came across an interesting court decision which considered the geographical limits of the bankruptcy automatic stay against creditors.
In this particular case, the U.S. debtor borrowed money from a creditor in Canada. The creditor sued the debtor in Canada and got a judgment in a Canadian court. The debtor then filed Chapter 7 bankruptcy in his U.S. home state. The Canadian creditor ignored the bankruptcy stay and continued to enforce the judgment against assets located in Canada. The bankruptcy trustee filed an adversary complaint against the Canadian creditor to enjoin future judgement enforcement and to recover Canadian assets seized by the creditor post-filing.
The bankruptcy court dismissed the trustee’s adversary proceeding because the court said the bankruptcy stay does not apply to the Canadian creditor and that the creditor is not subject to bankruptcy court jurisdiction. The bankruptcy court found that this creditor never established or maintained any identifiable contacts in the U.S., and therefore was not subject to the exercise of the bankruptcy court’s personal jurisdiction and not enjoined by the automatic stay. The decision suggests that foreign based creditors that do not do business in our country and have not assets here may ignore the automatic stay of a U.S. bankruptcy case. The case is: 3:08-bk
Posted in Court Decisions | Comments Off
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
