The Florida Bankruptcy Law Blog

Pre Bankruptcy Planning Can Include New Debt For Proper Purpose

A common question during a pre-bankruptcy meeting with a bankruptcy client is whether a debtor can incur any new debt between the time he first meets his bankruptcy attorney and the filing date. The answer has two parts.

You cannot run up your credit cards prior to bankruptcy for non-essential items and wife those charges out in a Chapter 7 bankruptcy. Incurring new unsecured debt knowing you will never pay back any part of the debt is an abuse of bankruptcy. If challenged, the new debt will be non-dischargeable. If the amount of new unsecured debt is large enough you could have your entire bankruptcy petition tossed out.

Means Test Calculations Not Helped By Borrowing From Debtor's Own 401 K

The means test allows debtors an deduction and income offset for secured debt payments. The greater amount of monthly secured debt payments the more likely a debtor is to pass the means test. One of my bankruptcy clients  suggested increasing his secured debt payments by taking out a loan from his 401k retirement account. He would use the money to pay down his home mortgage. There would be no fraudulent transfer or conversion into the homestead because the money would have come from an otherwise exempt asset- 401k plans are exempt in bankruptcy. He says that the loan would be secured by the balance held in the 401k. 

I do not think this plan will work for purposes of creating expense deduction for the means test. In the first place, the loan may not be considered secured because the debtor is borrowing from his own money. Also, monthly repayments of a 401k loan are not required. It is similar to a loan on life insurance. Interest accrues but there is no default if the borrower does not make monthly repayments. 

Therefore, borrowing your own money from a 401k, or a life insurance policy, is unlikely to help you qualify for bankruptcy under the means test.

 

 

Bankruptcy Issues In Florida Domestic Partnerships

I was reading post on a Florida domestic partnership  law blog which brought to mind the fact that I have represented several bankruptcy debtors who are part of same-sex couples. These debtors typically are living together in some form of domestic partnership. Because Florida does not recognize same sex marriages these couples have to find their own paths to estate planning and debt planning. 

Estate planning in domestic partnerships often causes unforseen financial losses when one of the partners has to file bankruptcy. Many same sex couples implement a simplified estate plan which relies on joint ownership with rights of survivorship. The couples living in domestic partnerships will open joint bank account, own real estate jointly, and even own automobiles as joint tenants. Their goal is to make sure the surviving joint tenant acquires ownership upon the death of one partner without the necessity of going through an expensive probate.

If one of the partners files bankruptcy their share of any non-exempt  property owned jointly with their domestic partner becomes part of the bankruptcy estate. The bankruptcy code gives the Chapter 7 trustee the right to partition jointly owned non-exempt  property and liquidate the property at auction. The non-debtor partner is entitled to half the liquidation proceeds, and money received at trustee sale is usually much less than market value.   

The bankruptcy law assumes that money in any joint financial account is equally contributed. If the non-debtor partner contributed most of the money to a joint account, the bankruptcy debtor has the burden to prove the disproportionate contribution.

The best practice is for domestic partners to separate their debts and their assets unless each partner is debt free and is not subject to being involved in civil litigation

Orlando Sentinel Article About Bankruptcy Filings Decrease

Richard Burnett, financial writer for the Orlando Sentinel quoted me in this front page article published May 17, 2012, about the decreasing number of bankruptcy filings. My quote is part of a much longer discussion about bankruptcy trends which I have observed both in my practice and as editor of this blog.
This bankruptcy blog is a good leading indicator of bankruptcy filings.

Although I practice bankruptcy in central Florida only, blog readers are located throughout the state. Blog readers and those who call me about blog posts mostly are people looking for general information about Florida bankruptcy. The majority of these blog readers are not yet shopping for bankruptcy attorneys. 

Debtors Can Strip Second Mortgage In Chapter 7 Bankruptcy Says Eleventh Circuit Court

A new court decision by the Federal Appeals Court for 11th Circuit makes it easier people to get rid of their second mortgage on upside down real property through bankruptcy. 

Up until now, homeowners could strip off their second mortgage in a Chapter 13 bankruptcy if their house was worth less than the first mortgage balance. The homeowner would file a Chapter 13 bankruptcy, submit a Chapter 13 payment plan, and then file a motion to eliminate the second mortgage as part of the plan. Most Chapter 13 plans last for five years. If the Chapter 13 debtor successfully completed his five year plan the court would issue an order stripping the second mortgage lien from the debtor’s residence. Courts have not permitted Chapter 7 debtors to strip second mortgages- until now. 

This month the 11th Circuit Appeals Court issued a decision which permits Chapter 7 debtors to strip unsecured second mortgages. The Appeals Court decision controls the law in Florida bankruptcy courts. 
There are several advantages of using Chapter 7 rather than Chapter 13 to strip a second mortgage. The mortgage strip is accomplished through the Chapter 7 discharge which is issued about 90 days after filing. The Chapter 7 debtor does not have to complete a five year payment plan to get rid of his second mortgage. Also, Chapter 7 bankruptcy is simpler and cheaper than Chapter 13. 

The decision said that people who have already filed Chapter 7 can take advantage of the decision and strip their second mortgage if their case has not been closed, even if they have already received a discharge. The case is In re: McNeal. 11-11352

Chapter 13 Does Not Permit One Spouse Filing Alone To Cram Down Mortgage

Here's an interesting bankruptcy court decision about stripping down a partially unsecured mortgage on an investment property in a Chapter 13 case. Chapter 13 permits a debtor to cram down the balance of a first mortgage on an investment property to the current market value and thereafter treat the mortgage as secured up to the property value and as a general unsecured claim of the mortgage amount above the current property value. At the end of the Chapter 13 plan the debtor ends up with a property having a reduced first  mortgage. Chapter 7 bankruptcy does not permit debtors to cram down first mortgages.

 In this particular case, a debtor ( husband) owned an investment property jointly with his wife. Both spouses were on the first  mortgage.  The debtor filed a Chapter 13 bankruptcy and moved to cram down a first mortgage on an investment property. His wife did not join in the Chapter 13; she was ineligible for a Chapter 13 discharge because she had recently filed Chapter 7. The prior Chapter 7 made the wife ineligible for a subsequent Chapter 13 discharge in this case.  

The court asked : Can one spouse who owns an investment property as tenants by entireties cram down a secure first mortgage on non-homestead property in a Chapter 13 when the other spouse is not a co-debtor in the same Chapter 13 case, or must both spouses file jointly and both obtain a Chapter 13 discharge for the first mortgage relief.

The court said that this husband could not cram down the mortgage on the jointly owned property without the wife filing as a co-debtor and both spouses being eligible for a Chapter 13 discharge.