All posts in Chapter 7

ABI Commission Report on Consumer Bk

The ABI Commission just released the report on consumer bankruptcy.  You can find the summary of findings by clicking here.

Some interesting recommendations:  allow for postpetition chapter 7 attorneys fees, get rid of both credit counseling courses for a chapter 7, and increase chapter 13 debt limit to $3 million and eliminate the secured / unsecured distinction.    Interesting stuff in the full report which can be retrieved by registering your email here.  Curious what they will do with your email….

 

Paying the mortgage in advance as prepetition exemption planning

I have asked bankruptcy attorneys many times over the years whether they think that it is okay to use non-exempt cash in the bank to prepay the mortgage before filing a petition.  It would only work of course if the mortgage payment created equity that was then exempt.  Every attorney I have ever asked has said something like, “Of course it’s okay.”  Some have looked at me strangely like “Why are you asking when the answer is obvious?”

I don’t see it as obvious.  It is a transfer to delay, hinder or defraud creditors.  “But it is exchanging non-exempt assets for exempt assets which is okay,” is the usual response.  The answer to that is “sort of.”

The BAP has recently affirmed Judge Robert Kwan in an unpublished opinion, In re Ellison, who denied this guy’s discharge based on a bunch of prepetition transfers, (“But it’s allowed exemption planning says the debtor’s atty.”)  The debtor paid six months worth of his first and second mortgages.  Why you ask?  The debtor’s words, “to assure that my wife and my daughter and myself had a home to live in through the end of the year . . . I did prepay [the mortgage in the past] but not to that degree, not six months, or four months, five months, whatever it was in advance, normally.”  According to Judge Kwan, “This out of the ordinary course transaction and Defendant’s admissions are additional evidence of his intent to hinder or delay his creditors by putting these funds out of their reach for his personal benefit.”   See In re Ellison, 2:15-ap-01001-RK.  Docket No. 30.

There were other transfers to be sure which had the effect of protecting about $250,000 of equity in the debtor’s home (after the homestead exemption).  Judge Kwan concluded that the debtor “crossed over the line’ of what is permissible behavior.  See In re Beverly, 374 B.R. at 244-246 (discussing the difficulty in drawing the line between legitimate bankruptcy planning and intent to hinder, delay or defraud creditors).”

Can the Court Avoid a Judgment Lien under 522(f) When the Debtor Owns no Real Property?

I have seen this issue come up on numerous listserves.  Judge Mund explains why the answer is no.

In re Kenney,  1:10-bk-11635-GM (Bkrtcy, C. D. Cal. Nov, 2018)

Issue:   Is a 522(f) appropriate to avoid a prepetition judgment lien when the debtor owned no real property on the petition date?

Holding:   No.  There is no lien to avoid.

Judge Mund

The debtors filed chapter 7 and got their discharge in 2010.  At the time a creditor had a judgment against them and had recorded an abstract of judgment.  They had no real property at the time.  In 2018, they are trying to buy a house.  They reopened their case and filed a Motion to Avoid Judgment Lien under 522(f).

Judge Mund denied the motion on the basis that there is/was no lien to avoid.

Because there is no valid lien to be avoided, Debtor is not entitled to the protections of 522(f).  The Court recognizes that Debtor is trying to ensure that no encumbrance results from a pre-petition recorded abstract of judgment; such a result would have the absurd consequence of creating an unenforceable lien on property acquired post-petition, but only in the specific counties which the creditor recorded the abstract of judgment.

Suing Debtor for Specific Performance – Discharge Violation? Maybe not…

A discharge under 727 discharges a debtor from all prepetition debts (liability on a claim) and any liability on a claim (right to payment).   But what if the debtor is sued for something other than a “right to payment”.   Is that a discharge violation?  Hmmm….let’s take a look at an example.

Read more…

Subtle Difference Between “Deemed Exempt” versus “Claimed Exempt” — Just Because Schedule C Lists the $100 in Bank Account Does Not Mean Debtor Can Immediately Use It

I tried to make the title as concise as possible — Ockham’s Razor failed.

Client comes to see you and they have $5,000 in their checking account.  You list it on Schedule B then exempt it on Schedule C and file the case.  The 341(a) is in 30 days.  Client goes to the bank the next day and withdraws all of the funds to pay rent and spend it on gambling.  You don’t think it is a problem because the funds have been fully exempt.

But is it?

In Section 70a of the former Bankruptcy Act, there was an automatic exclusion of exempt property such that by simply listing the asset on Schedule C — then that asset was automatically and immediately exempt.  That is not how it works under the current Code — it is not automatic.  I was reading the Mwangi case from the Ninth Circuit that clarifies a subtle distinction between an asset that has been “claimed exempt” versus one that is actually “deemed exempt.“   In the hypo above, it is a “no harm, no foul” situation but it’s still worth thinking about.

Read more…

Receivership and Bankruptcy

Imagine this, prepetition, Debtor owns and operates 50-unit Apartment upon which Wells Fargo holds a note and deed of trust.  Debtor defaults on the note and WF commences foreclosure.  The state court appoints you Receiver to take possession of and operate the Apartments.  The Apartment is mismanaged and you begin improving the Apartments and collect $100,000 in new rent and the bank, WF, gives you additional funds also in your capacity as Receiver.   As you are running the Apartments and holding onto a substantial amount of funds — debtor files Chapter 11 bankruptcy and orders you, as the Receiver, to turnover the funds to him since it is property of the estate now.

Will the court grant Debtor’s Motion for Turnover such that the funds you hold as Receiver have to be turned over to the scumbag Debtor who will likely dissipate the funds?  

Read more…

New Median Income Amounts Effective After November 1, 2018

Census Bureau Median Family Income By Family Size

(Cases Filed On or After November 1, 2018) Read more…

Student Loan Guru Austin Smith Writes on Private Student Loans

Austin Smith is a force nationwide championing issues for student loan debtors.  You can get his excellent article, Why So Many Get It So Wrong That a Private Student Loan is Uniquely Protected in Bankruptcy, here. 

The common belief that all student loans are protected from discharge in bankruptcy is based on a misunderstanding of 11 U.S.C. § 523(a)(8).  Since 1990, bankruptcy courts have been misreading the statute to prevent any student debt that could be construed as providing educational benefits or advantages from discharge.  The flawed logic in student bankruptcy cases has thus become (1) all debts that confer educational benefits are protected from discharge; (2) the debt in question facilitated the debtor’s education and as such, conferred educational benefits; and (3) the debt is not dischargeable.

First, subsection (A)(i) only protects federally insured or nonprofit student loans.  Second, subsection (A) (ii) only protects debts resulting from noncompliance in contractual service scholarships and grants.  Third, subsection (B) only protects private student loans that meet narrow Internal Revenue Code qualifications.  A sizeable portion of private student loan debt falls outside all three of these categories, and must be treated as non-qualified private student loans that have no protection from discharge.

Murder and Joint Tenancy

Holding property as joint tenants means there is a right to survivorship.  This means that when one joint tenant dies then the interest of that joint tenant passes automatically to the other joint tenant.  So if Amy and Fred own property as joint tenants then each has 50% joint tenant interest.  Also, the parties can also record a “mutual consent agreement” which says that the joint tenants have agreed among themselves that their JT can only be severed if everyone agrees.   This prevents Fred from transferring his interest without Amy’s consent.

Now let’s add a Halloween twist — what if Amy (knowing these rules) wants all of the 100% interest in the 200 acre property and at night murders Fred!?   That would be Amy would get all of Fred’s interest automatically.  Right?  Not so fast…..

Read more…

More Taggart Fallout

Bruce v. Fazilat (In re Bruce), —- B.R. —-,   8:15-ap-01028 (Bkrtcy, C. D. Cal. July, 2018, J. Wallace)

Issue:   Did the creditor here violate the automatic stay and/or the discharge injunction and if so, what are the appropriate damages?

Holding:   Yes as to both violation of the automatic stay and violation of the discharge injunction.  Actual damages of $15,000 for violation of the stay but no damages as to violation of the discharge injunction.

Judge Mark Wallace

The creditor here was the debtor’s landlord and was trying to evict him from the rental property where he lived.  The creditor, with knowledge of the bankruptcy petition, “turned off the electricity and then placed a new padlock on the electrical box,” and later sent someone to the property who “began banging on the door in an attempt to breach the door and enter the Property’s interior.”  That person told the debtor he owed them money.  The creditor contacted the debtor’s employer for the purpose of getting him fired – which worked.  Before the discharge was entered, the creditor filed a motion for relief seeking permission to proceed with the unlawful detainer.  That motion was granted but the “portion of the Lift Stay Motion requesting that the state court be permitted to award ‘[a]ll postpetition rents, attorney’s fees, and costs’” to creditor was specifically denied.  Nevertheless, the creditor sought and obtained a judgment for money against the debtor, after the discharge was entered.  At trial, the creditor’s attorney argued that the lease had terminated prepetition and that he had the right to holdover damages.

Judge Wallace ruled that the creditor violated the stay (obviously).  The state court judgment is void.  As to damages, the debtor’s “evidence of damages is somewhat thin.”  Judge Wallace ruled:

The Court concludes that Plaintiff is entitled to actual damages of $12,500.00 plus punitive damages of $2,500.00 (for a total of $15,000.00) in respect of the stay violations described above. Additionally, attorney’s fees and costs are awarded to Plaintiff.

With respect to monetary sanctions for a discharge injunction violation, the Court notes that the United States Court of Appeals for the Ninth Circuit has recently held that in the context of a discharge injunction violation, monetary sanctions can be imposed only if the movant shows that the creditor “knew the discharge injunction was applicable.” Lorenzen v. Taggart (In re Taggert), 888 F.3d 438, 443 (9th Cir. 2018). Additionally, “the creditor’s good faith belief that the discharge injunction does not apply to the creditor’s claim precludes a finding of contempt, even if the creditor’s belief is unreasonable.”

Here, there is no doubt that Mr. Sproul (Defendant’s attorney) had a good faith belief that he was properly bringing an action in state court for holdover damages and attorney’s fees.  The Court therefore declines to impose monetary sanctions for the discharge injunction violation that occurred. 11 U.S.C. § 524(a)(2).  However, this in no way disturbs the Court’s determination that the 2017 Judgment is void and of no effect pursuant to the plain language and meaning of 11 U.S.C. § 524(a)(1).