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Minimum payments on Bank of America credit cards: going up.
The Massachusetts foreclosure rate as measured by April filings: going down.
Gasoline prices: going up.
The cost of electricity as we head into the summer season: going down.
Number of people over the age of 45 seeking bankruptcy protection: going up.
When a debtor does not fully disclose all property on Schedule B (personal property), the consequences can be harsh. A debtor recently learned how harsh those consequences can be in the recently decided 10th Circuit Court of Appeals case of Gillman v. Ford.
The debtor, who was employed as a paralegal, was seriously injured in a car accident. Shortly after the accident, she retained a law firm to represent her in bringing a claim against the other driver. Shortly after filing a complaint seeking damages, the debtor filed bankruptcy. The debtor hired a different law firm to handle the bankruptcy matter. The debtor did not tell her bankruptcy attorney about the accident litigation, nor did the debtor identify the accident claim on her schedules. The trustee filed a no-asset report (sometimes referred to as a no distribution report) and the bankruptcy case closed. Approximately one month later, the claim settled for $50,000.
The debtor claimed that she was unaware that she had to identify the claim on her bankruptcy schedules. She claimed that she learned about it for the first time just before the case settled when a paralegal told her she had a duty to do so. The debtor claimed that she immediately called her bankruptcy attorney to disclose her interest in the suit. After she successfully reopened her case, the debtor filed amended schedules identifying the settlement. She also sought to exempt all of the proceeds under Utah state law. The Chapter 7 Trustee objected to the exemption, claiming that the debtor intentionally concealed her interest in the suit, and disclosed it only after she learned she could not access the settlement proceeds otherwise.
At a hearing on the Trustee’s objection, the debtor testified that she did not disclose the claim because she did not believe she had to because any settlement was exempt under state law. She also claimed she thought she was only required to identify claims brought against her, and no claim she was asserting against others. Her testimony however, was not altogether consistent.
The bankruptcy court found that the debtor knew of the claim and had motive to conceal it, and because she was a paralegal, she knew that he claim was exempt and made a conscious decision not to disclose it. Because she failed to identify the claim and because the court found the debtor’s failure was a “blatant dishonesty”, the court denied the exemption. This ultimately means that the $50,000 would be turned over to the Chapter 7 Trustee who could then use the proceeds to pay creditors.
Debtor appealed to the 10th Circuit Bankruptcy Appellate Panel. The BAP reversed claiming that there was not sufficient evidence in the record to support a finding of bad faith and that the debtor’s failure to disclose could be equally attributed to inadvertence as well as intentional concealment. This was based on their findings that the debtor’s minimal legal training could not be used to support an inference of bad faith, the trustee failed to articulate a motive for concealment in light of the fact that the settlement proceeds would be otherwise exemption, and there was no prejudice arising from the non-disclosure since the asset was exempt.
But on further appeal, the 10th Circuit Court of Appeals agreed with the bankruptcy court. While acknowledging it was a “close case”, the Court of Appeals found that the bankruptcy court did not abuse its discretion in finding that the debtor intentionally concealed the asset.
There is much case law addressing a debtor’s failure to disclose an asset in a bankruptcy. In virtually all cases, it is an asset that would not have been exempt (or would be only partially exempt). However, in this case, the asset (i.e., the personal injury claim) was completely exempt. Had the debtor listed the claim on her schedules, Utah state law provides that all of the proceeds be exempt. Thus, there was little to no risk in listing the claim. Yet, because this debtor failed to list the claim in a timely manner, the court has effectively ruled that she now forfeits her rights to those proceeds. This was an unfortunate and costly error of judgment. It was also completely avoidable.
In a May 10, 2007 ruling, the Bankruptcy Court for the Central District of Illinois found that a Debtor did not commit fraud when she borrowed money from her employer. In this interesting case, the Debtor asked her employer (the owner of the McDonald’s franchise she worked for) to borrow money. The Debtor was going through a divorce and needed some financial assistance to make ends meet.
The employer considered the Debtor to be a valued employee and personally made a number of loans to the Debtor. A promissory note was signed by the Debtor wherein she agreed to make payments every two weeks until the balance was paid, or until she received funds in her divorce to pay the balance. Payments on the loan were automatically deducted from the Debtor’s paycheck. Six months after obtaining the last loan, the Debtor quit her job. About two years later, the Debtor filed a Chapter 7 petition.
The employer filed an Adversary Proceeding seeking to prevent the loan from being discharged. The employer argued that the Debtor had obtained the note by fraud and false pretenses, which is true, would prevent discharge of the debt under Section 523(a)(2) of the code. First the employer attempted to claim that because the Debtor had promised to repay the loan and did not, this amounted to a misrepresentation. The employer also claimed that the employee represented that she would keep working for the employer and because she did not, that also constituted fraud.
The Court did not agree. First, the mere fact that the Debtor did not pay the loan is a simple issue of breach of contract and “without more, cannot support a finding of non-dischargeability.” Additionally, because state law provides that employment is “at-will” unless there is an express agreement stating otherwise, both employer and employee had the right to terminate the employment at any time, and for any reason.
Other facts also supported dischargeability: the Debtor had borrowed approximately $3,600 in 2002, and made “substantial progress in paying that loan” before she borrowed more money. In addition, there was no evidence when the employer made the last loan that the Debtor knew she would be quitting her job six months later. For all of those reasons, the debt to the employer was discharged.
The case is Dubski v. Butler, Adversary No. 06-7174 (In re Butler, 06-70541).
The 9th Circuit Court of Appeals upheld a lower court’s ruling compelling Chapter 7 debtors to turn over tax credits to the Trustee. The credits arose from a refund for overpayment of 2001 federal and state (Arizona) income taxes. Rather than receive a refund directly, the debtors opted to have those funds applied to future tax liability. Sixteen days after making that election, the debtors filed for bankruptcy protection.
In early 2003, the debtors signed their 2002 federal and state income tax returns and applied the overpayments from 2001 to their 2002 tax liabilities. The Trustee contended that those credits from 2001 were the property of the Chapter 7 estate. The debtors argued that since they made the election, they had effectively given up their entitlement to a refund. They also contended that pursuant to Sections 6402(b) and 6513(d) of the Internal Revenue Code, the elections were irrevocable, and thus there was no interest left for the bankruptcy estate.
The 9th Circuit disagreed. Bankruptcy Code Section 541 defines property as “all legal or equitable interests of the debtor in property as of the commencement of the case.”
Interpreting the term “property” broadly, …’because the right to receive a tax refund constitutes an interest in property…the election to….relinquish the right to a refund necessarily implicates a property interest.’
The case is Nichols, et al. v. Birdsell, 9th Circuit No. 05-15554
People who come to me seeking bankruptcy counsel, in a way, are seeking to get to a destination. In most cases, it’s getting themselves out of the financial mess they have found themselves in. They are looking for a end point: a place where collection calls stop, where the sense of hopelessness ends, and where the future seems a bit less daunting. Many times, I have described it as similar to a Boy Scout helping someone cross the street. My job is to make sure they don’t mistake a puddle for a pot hole, or get hit by a bus. Recently, I met with someone who used a different metaphor, and I wanted to share it.
To describe it most simply and antiseptically, bankruptcy is a process by which a person or business may extricate themselves from the clutches of unmanageable debt. A client told me that he viewed it as a tool. In a sense, that is true. Bankruptcy is a powerful tool that enables debtors to regroup, reorganize and move on. He specifically mentioned a table saw. And this got me thinking.
I do not know how to use a table saw. I took shop in junior high school and made a spice rack that could only hold those small food coloring bottles, and there are only four of those. It stayed empty. In my head I had a sense of what the spice rack would look like. It didn't turn out that way, even though my mom still hung it up in the kitchen for everyone to see (and for my siblings to openly mock me about). IIt is safe to assume that I have not used any such power tools since junior high school. Don’t laugh, but I am pretty sure – but only pretty sure – that I know what a table saw looks like. Thus, if I have the need for such a power tool, I am likely go to someone that knows how to use it (and is very sure that they know what it looks like).
The same applies for bankruptcy. In searching for a bankruptcy attorney, it’s important to find someone who “knows the tools.” Metaphorically speaking, someone who knows how the blade cuts, how the wood can jump up if it’s placed incorrectly on the table and of course, someone who remembers to measure twice and cut once. Also, as my client astutely pointed out: “I don’t want to lose a finger.” I don’t want him to lose it either.
Clients have been kind enough to share with me some of the many letters and solicitations they receive from people and companies who have learned of their looming foreclosure. Actually, to be more accurate, clients tell me they are deluged with these letters. Some of these letters offer assistance and provide truthful and accurate information. Others however, are clearly designed to mislead.
Recently a co-called “US agency” (who for now will remain nameless) sent a letter to a client declaring this:
Bankruptcy stops foreclosure but you will lose your home. (Note: Only 11% of bankruptcies are successful.
People facing foreclosure need to do their research and not rely on what one company, or a group of companies tells them. Unless a bankruptcy attorney who they have met with has told them that in no uncertain terms, bankruptcy is not an option, no one should assume that it is not. And companies who make such broad sweeping generalizations that are simply false should be avoided.
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