In May 7 decision the First Circuit Court of Appeals ruled that a debtor was limited to the amount of his stated objections. For those thinking of preparing cases on their own, or for others with perhaps different motives, the case teaches a good lesson: you reap what you sow.

In a chapter 7, all of the debtor’s property becomes property of the estate, and is sold. The proceeds of the sale are used to pay creditors and other administrative expenses. The debtor is permitted to keep property – what are referred to as exemptions. In addition to other documents, debtors are required to file schedule B, which identifies personal property, and schedule C, which sets forth the debtor’s claimed exemptions. The code requires that if any party wants to object to any claimed exemption of the debtor, the party must file an objection within 30 days following the conclusion of the creditors meeting, or Section 341 meeting. If that is not done, the property slips “beyond the estate’s grasp.”

In this case, the debtor listed on Schedule B a total of about $170,000 in money that was owed to him. On Schedule C, he claimed that the claims were only worth $8,000 and were otherwise exempt from the estate. No objection was filed. About a year later, the trustee asked the bankruptcy court to approve a settlement in the amount of $100,000.

The debtor argued that the estate had no interest in the lawsuits at all. But the Bankruptcy Court in Puerto Rico ruled that the debtor had not exempted the lawsuits, but only $4,000 partial interest in each suit. It approved a settlement where the proceeds could be paid to the trustee, with $8,000 paid to the debtor reflecting the amount of their exemption. The US District Court for the District of Puerto Rico affirmed and the debtor appealed.

Continue reading "A Lesson in Exemptions" »

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When people gamble, they can win. But let’s face it: not often. When they lose, they can lose big. When is a gambler entitled to relief under the Bankruptcy Code? While the answer is not entirely black and white, a February 29 decision out of the Northern District Ohio sheds some light on the issue.

The debtor’s gambling habit started just for fun (with no money) but then, money slipped into the games. The money was followed by credit cards. All of this led to a downward spiral during which time the gambling began to consume the debtor’s life. She visited online gambling sites in the morning before going to work, would come home from work at lunch and gamble, and then do it throughout the evening at the end of her work day. At some point, the debtor realized that it was out of control, and she started seeing a counselor.

After she stopped gambling and was seeing her counselor, she cut back on household expenses. She canceled her home internet service and checked emails only from work. However, by this time she had accrued high balances on her credit card accounts.

Rather than run to bankruptcy court, she attempted to investigate various debt consolidation services, but found that the monthly payments would be more than what she could afford.

Continue reading "This Debtor Knew When to Fold" »

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Since the 2005 Bankruptcy Act, debtors have had to gather and provide their attorneys more documentation. There are a variety of documents that debtors need to collect, but the class of documents that is often difficult to put one’s hands on at the last minute is pay stubs.

The 2005 Act required all debtors to complete a Means Test. In theory, the form was designed to help determine whether a bankruptcy filing was an abuse of the Bankruptcy Code. To properly complete the form, one of the first calculations needed is that of “current monthly income” or CMI.

Continue reading "Storm Preparation: Payment Advices" »

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Everyone has found themselves saying that at one time or another. Perhaps it was the regrettable decision of a particular business venture (or business partner), or perhaps it was ordering the chicken salad special, rather than a turkey club. Or, perhaps, you happened to be joint debtors who recently learned what can happen when you do not do what you should have and could have done.

The debtor’s joint case was filed as a chapter 13 in July of 2007. At a later hearing, the debtors advised the court that they intended to convert the case to chapter 7. At a later 341 meeting, the debtors provided the trustee with a copy of their 2005 income tax return, but did not provide a copy of the 2006 tax return, even though that return had been filed. The Trustee warned the debtors to produce the return, and advised them that he would seek a dismissal of the case if it was not provided. The meeting was continued to the following month to allow the debtors time to give the returns to the trustee.

At the continued meeting, the debtors’ attorney appeared without the debtors and without the tax return despite what she relayed was “harsh admonitions to her clients” to produce the documents. The return was eventually provided 36 days after the deadline set forth in Section 521(e)(2)(A)(i).

This code provision requires the debtors to provide the trustee a copy of the federal income tax return required under applicable law for the most recent tax year ending immediately before the commencement of the case for which a federal income tax return was field. The code requires that the case be dismissed unless the debtor can establish that the failure to abide by the provision was beyond the debtor’s control, however, the court acknowledged that seeking dismissal was within the discretion of the trustee.

The Chapter 7 Trustee exercised that discretion and moved to dismiss the case because the debtor did not provide copies of the 2006 tax returns. In allowing the motion, the court noted that “Congress did not intend that trustees spend inordinate amounts of time chasing down tax returns from debtors who have sought relief in bankruptcy.”

In re Nordstrom, 381 BR 766 (Bankr.C.D.Cal., January 18, 2008).

Posted by Bill McLeod at 7:38 AM | Permalink | Comments (0) | TrackBacks (0)

Transferring real estate while contemplating bankruptcy can raise some issues. But transferring real estate after the bankruptcy case has been filed without the permission of the bankruptcy court is a big “no no.” And as a debtor in learned in a February 11 Bankruptcy Court ruling out of Worcester, it can raises some serious problems. In his case, a denial of his discharge.

The chapter 7 debtor filed the case on May 18, 2007. He owned his home along with his mother. According to his bankruptcy schedules, he valued the home at approximately $315,000 and with a mortgage of about $263,000. A mere 7 days later, the debtor transferred his interest in the home to his mother and father for $1.00. The debtor’s parents paid off the outstanding mortgages, as well as some other bills at closing.

Debtor attempted to argue that there was no equity in the home and that the appraisal should not be considered as “completely accurate”. However, the appraisal was dated 8 days prior to the case being filed, and it was an appraisal commissioned by the debtor himself. Notwithstanding this creative position, the debtor never produced any evidence demonstrating that the property would be appraised at another value (i.e., by submitted evidence of another appraisal, or of some substantive defect with the appraisal submitted).

The trustee contended that the property had equity and that the debtor intended to “hinder, delay or defraud” the creditors, the trustee and the bankruptcy estate by transferring it out of his name. Because of that not only should the debtor’s discharge be denied, but the transaction should be avoided (or set aside).

Continue reading "Unauthorized Post Petition Transfer Leads to Denial of Discharge" »

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In January, the 8th Circuit Bankruptcy Appellate Panel affirmed a bankruptcy court ruling that revoked the discharge of a debtor who kept his tax refund. The debtor filed his petition on October 10, 2005 and his meeting of creditors took place about one month later. At that meeting, the chapter 7 trustee advised the debtor not to spend any tax refund without contacting the trustee. The trustee gave the debtor a handout which read in part:

Warning: Do not spend any of your tax refunds until you have received approval from my office, even if you have received notice from the Bankruptcy Court that a bankruptcy discharge has been entered. The bankruptcy discharge does not close your bankruptcy case or eliminate your need to turn over non-exemption assets.

Failure to comply with the terms of this letter or to cooperate with me in the administration of your bankruptcy estate may constitute cause to revoke your bankruptcy discharge. You will receive only one notice from my office of non-exempt monies due your bankruptcy estate and upon non-compliance, I will seek to revoke your discharge.

The debtor received his discharge in January of 2006, and in February he filed his tax returns. His refunds totaled approximately $3,500, which was spent on living expenses.

In June of 2006, the trustee filed a motion to seek a Rule 2004 examination (which is similar to but not the same as a deposition) of the debtor. The trustee also requested that the debtor produce the 2005 tax returns. Debtor produced the returns, but did not appear for the examination. Later in June, the trustee made demand for $1,556.11 of the tax refunds: the amount of non-exempt assets that belonged to the bankruptcy estate. The debtor failed to do so.

In July, the trustee sought an order from the bankruptcy court seeking again to examine the debtor under Rule 2004 and requesting that the debtor bring the $1,556.11 to the examination. Debtor did not attend nor did he pay the amount.

The US Trustee filed a complaint seeking a revocation of the discharge for knowingly and fraudulently failing to deliver the refunds to the chapter 7 trustee. Debtor offered many reasons for why he spent the refunds, but those excuses were not believed. The debtor was warned, and in spite of the warning, spent the money. The discharge was revoked….all for $1,556.11. The case is Fokkena v. Klages, 8th Cir. BAP, 07-6051 SI.

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The Mortgage Bankers Association which represents the real estate finance industry is apparently not pleased with a report by the Center for Responsible Lending which urges reforms to the US Bankruptcy Code. According to David Kittle, the Chairman Elect of the MBA:

Policymakers should ignore this report as it is more rhetoric than fact. Bankruptcy reform is not the answer for consumers having trouble making their mortgage payments. It will drive up the cost of credit in the form of higher rates, larger down payments and greater closing costs.

Further, bankruptcy is a logistical and financial nightmare for consumers. Filing for bankruptcy is expensive and approximately two-thirds of all bankruptcy plans fail. Nobody should be holding it out as a better alternative to working with your lender to try to find a mutually agreeable resolution.

But the CRL is responding with a report that shows that voluntary loan modification fall short. You'll find a link to the PDF report, and the statistics here.

As for Kittle’s comments, I have no idea where the uncited reference to “two-thirds of all bankruptcy plans fail.” Where does that factoid come from? There are lots of reasons why bankruptcy cases fail, but there is no magical statistic that I am aware of. That's flat-out misleading. And as for a "nightmare", oh come on now. While none of my clients want to be in bankruptcy, they would rather keep their home and put food on the table, than live with the proposed "resolutions" offered by their lender.

And unfortunately, for Mr. Kittle, the sad news is that for an increasing number of homeowners, filing bankruptcy is the better alternative to working “with your lender.” The fact is, some lenders are unwilling (or for their own reasons unable) to “work” with a homeowner. When there can be no “mutually agreeable resolution”, bankruptcy is the better alternative. And until lenders start getting serious about modifications, and about their lending practices that got the country into this mess, that alternative will only appear better and better.

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The Executive Office of the US Trustee announced that it has suspended designation of bankruptcy cases subject to audit. The reason? Congress provided no funding in the FY 2008 Consolidated Appropriations Act.

Read more here.

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Thinking about filing bankruptcy? Do you have a paper shredder or know a friend with a dumpster? You should know that a US Bankruptcy Court judge in Boston recently ruled that a Chapter 7 debtor was not entitled to a discharge because documents had been destroyed.

The case involved a carpenter and homebuilding contractor who operated under a corporate entity. The corporation had employees and handled large projects involving hundreds of thousands of dollars. While perhaps a good contractor, the debtor was not a savvy business person but that did not stop him from being the record keeper for the company.

The business records were kept in a large plastic bin which included canceled checks, copies of contracts and even some personal records. He did not maintain a cash flow ledger for the company.

In 2004, the company started to face cash flow problems which eventually snowballed. He and his company were forced to abandon projects they had been paid on and he expected to be sued. The debtor consulted a bankruptcy attorney. By 2005, the debtor became seriously depressed about the company’s financial problems so much so that the mere site of the plastic bin made him sick. The Court noted that “sometime between December 2004 and February 2005, he relieved himself of this immediate problem by driving the bin to, and depositing it in, a dumpster belonging to a roofing contractor friend.”

Continue reading "Destroyed Documents leads to Denial of Discharge" »

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There’s been a lot of debate over how unfair BAPCPA (the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) is on consumer debtors. Some of that debate can actually be found on this site. There have been aspects of BAPCPA that I have called silly, and some that we have to question the logic on. Recently, the US Bankruptcy Court in New Hampshire issued a ruling that appears to correctly interpret the post-BAPCPA Bankruptcy Code, but also shows how absurd the amendments to the code may be.

Prior to BAPCPA, a Chapter 7 filing was not presumed to be an abuse of the bankruptcy code. Abuse needed to be proved by the party claiming it, and a finding of substantial abuse could lead to dismissal or conversion

Under BAPCPA, the word “substantial” disappeared, leaving only “abuse.” Also, the means test was implemented, creating an objective means to determine whether there is a presumption of abuse. If there is a presumption of abuse, the United States Trustee must file a report indicating whether the case is presumptively abusive under 11 U.S.C. Section 707(b) within 10 days of the creditor’s meeting. Within 30 days after that, the US Trustee must either file a motion to dismiss or convert the case, or a statement explaining the reasons why the US Trustee does not consider such a motion to be appropriate.

In the New Hampshire case, the US Trustee wanted to compel the debtor to produce documents as well as submit to a Rule 2004 examination (which is something like a deposition, but isn’t really the same thing – which is another subject I should write about sometime). The US Trustee argued that it did not have enough information to evaluate whether the debtor’s case was presumptively abusive. The US Trustee also argued that under Rule 9011, she had an obligation to conduct a reasonable investigation before filing a motion. Under this rule, a party can be sanctioned for filing a baseless pleading in court. In response, the debtor argued that the US Trustee’s request was overbroad and unduly burdensome.

“Both parties are right,” the court wrote “and both parties are wrong.”

Continue reading "The Two Edge’s of BAPCPA’s Sword" »

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Last week, the US Bankruptcy Court in the Western District of Kentucky ruled that a Chapter 7 debtor’s credit card debt was not dischargeable because the debtor used a card that should have been closed. The debtor and the plaintiff divorced in 2003 and as a part of the divorce, the parties agreed to pay their own credit card debt as well as hold each other harmless in the event of default.

The husband and wife had a joint Fleet Visa which was to be paid by the husband. He paid it in April of 2003. The debtor/wife remarried in December of that year and she changed her name. That marriage only lasted a year, but the wife again married and again changed her name.

In 2004, Fleet was bought by Bank of America and issued a new credit card on what was formerly the Fleet Visa account. The debtor used the card, and when the bills arrived, the bills were addressed to her former ex-husband and the debtor using the name she had while married to him. She never notified the bank she was divorced or that her ex-husband’s name should not be on the card.

In 2006, after some business problems and an illness, the debtor filed bankruptcy. The husband sued claiming that the debt was not dischargeable on the basis of fraud. He argued that the debtor knew that she was using a card that was in both their names.

Debtor claimed that she did not know that the husband’s name was still on the account – and that because she had so many other bills at the time, she had no idea it was a joint account. However, this explanation did not make sense since the husband’s name was on the card, and on the bill, and the bills were in a name she used two marriages ago. She also had to reactivate the account, and thus had to have known at that time it was a joint account – as well as in her former name. Even “[i]t was not done knowingly,” the court wrote, “it certainly was done with gross recklessness.”

Because debtor did not take some very simple steps to change the holder of the account, the debt is non-dischargeable, and because of the hold-harmless language of the settlement agreement, she must pay it. Based on these facts, shouldn’t the debtor have known better?

Posted by Bill McLeod at 4:50 PM | Permalink | Comments (0) | TrackBacks (0)

I received a call today from someone with questions about Chapter 7. I receive many calls a day, but what made this call interesting was that the caller told me that they conferred with another attorney and was told that with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, only 50% of debt was now dischargeable in a Chapter 7. My response was "nope, not true."

The caller also told me that according this other attorney there was no law that required a bankruptcy filing to appear on the credit report for 10 years. According to what the attorney purportedly stated: “Credit card companies want you to believe there is a federal law out there that requires it, but there is not.” My reponse was "that's not my understanding." Since this issue is not a primary one in my practice, it's not something I can rattle off the tip of my tounge, like I might be able to with regard to discharge exceptions. So I decided to take a quick detour from my petition preparations and research the issue a bit further.

Let me start with the easy one: nothing in BAPCPA declared that only 50% of debt would be discharged in Chapter 7. If anyone is telling you that, they do not bankruptcy law.

The claim that there is no federal law that requires a credit card company to report a bankruptcy filing is also hogwash (I could think of another term, but this is a professional site). Title 15, Section 1681c(a)(1) of the United States Code states that credit reports may not contain information concerning “[c]ases under Title 11 or under the Bankruptcy Act that, from the date of entry of the order for relief or the date of adjudication, as the case may be, antedate the report by more than 10 years.” And there is an exception. Under 1681(b)(2) a credit report may contain information about a bankruptcy that is more than 10 years old if the report is to be used in connection with a “(1) a credit transaction involving, or which may reasonably be expected to involve, a principal amount of $150,000 or more; (2) the underwriting of life insurance involving, or which may reasonably be expected to involve, a face amount of $150,000 or more; or (3) the employment of any individual at an annual salary which equals, or which may reasonably be expected to equal $75,000, or more.”

So the bankruptcy can stay on the credit report for up to 10 years, an din come cases, even longer. If any attorney tells you otherwise, invite them to call me.

Posted by Bill McLeod at 11:58 AM | Permalink | Comments (0) | TrackBacks (0)

When a bankruptcy petition is filed under Chapter 7, an estate is created. Unless the property is otherwise exempt, all of the debtor’s property belongs to the estate. The Chapter 7 Trustee is then required to sell the property to pay creditors. In a recent case, a debtor was a sole trustee of a real estate trust and the real estate was owned in the name of the realty trust. But in this case, Massachusetts Bankruptcy Judge Robert Somma held that the property belonged to the debtor’s Chapter 7 estate.

The case involved property in Malden. The trust was created by the debtor and the declaration of trust provided that: “This instrument [the declaration of trust] may be amended at any time by a written instrument signed by the trustees and acknowledged by one or more of them.” It also provided that the trustee could terminate the trust at any time. If he elected to terminate the trust, he was obligated to disburse the trust property to the beneficiaries (included other family members, but not the debtor).

Continue reading "Mass. Bankruptcy Judge Rules Trust Property Is Chapter 7 Estate Property" »

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Here’s one for the “believe it or not” list: ostriches do not hide their heads in the sand. I know – you’re thinking “get OUT!” I was as shocked as the next person. Apparently, while they do not bury their head, they will sometimes lie on the ground trying to make themselves look inconspicuous. According to The Phrase Finder:

The story also relies on the supposed stupidity of ostriches, and of birds in general. In fact, there's little to support that either as birds have a significantly larger brain to weight ratio than many other species of animal. The notion is that the supposedly dumb ostrich believes that if it can't see its attacker then the attacker can't see it. This was nicely reformed as a joke on Douglas Adams' 'Hitchhiker's Guide to the Galaxy', in which the 'Ravenous Bugblatter Beast of Traal' was described as 'so mind-bogglingly stupid that it assumes that if you can't see it, then it can't see you.'

Birds are not stupid (at least not all of them), and I find it difficult to believe that a bird that merely lies about hoping not to be avoided (such as one might do at a high school or college reunion) is intellectually deficient. So if ostriches don’t hide their heads in the sand, why do people struggling with high house payments often do just the opposite?

Continue reading "A Message For Those With Their Head in the Sand" »

Posted by Bill McLeod at 4:35 PM | Permalink | Comments (0) | TrackBacks (0)

While my practice is limited to Massachusetts, I understand that people all over the country read this blog. (Of course, they do so with the understanding that it’s not legal advice and that they should confer with a local attorney who can help them.) With that said, my observations this morning in Bankruptcy Court might be helpful to just about anyone facing bankruptcy.

Last week, a Chapter 13 case was filed by a debtor who had a pending Chapter 7 case which had been filed earlier this summer. The judge asked “why do I have two pending bankruptcy cases at the same time?” A good question.

Continue reading "Bankruptcy Court Observations: Bad Lawyering" »

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The Boston Herald reports this morning:

The number of Massachusetts people filing for Chapter 13 personal bankruptcy jumped to 2,187 during the first half of 2007, up 85 percent over the previous year and up 78 percent during the same period in 2004, prior to when the U.S. bankruptcy system was overhauled in 2005.

The number of Chapter 7 liquidation filings also more than doubled to 4,251 during the first half of the year, compared to the year-ago period, according to preliminary data from the U.S. Bankruptcy Court’s Massachusetts District.

Read more here

Posted by Bill McLeod at 10:12 AM | Permalink | Comments (0) | TrackBacks (0)

A commenter posed an interesting scenario. She received a Chapter 7 discharge in 2002. Since then, she rebuilt her credit and was able to get into her home. Unfortunately, she ended up with a subprime mortgage with payments that are high. Those payments were manageable when she was making $80,000 a year. But she recently lost her job. Now those payments seem daunting. So, the question is, can she seek bankruptcy protection again?

Continue reading "Filing Bankruptcy. Again." »

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