Florida Bankruptcy Law Blog

Tenants By Entireties Protection in Bankruptcy Proceedings

The protection afforded tenants by entireties property in bankruptcy court is different than in state court. All TE property is protected in state court from the debts of either spouse. In Chapter 7 bankruptcy, the debtor’s TE property is unprotected and is part of the bankruptcy estate available to creditors to the extent the debtor and his non-filing spouse have any joint debt. I represented a debtor who claimed TE exemptions and had no joint credit cards. I thought the TE exemption would protect jointly held property. However, upon examination by the trustee the debtor stated that he and his spouse owed IRS taxes for the previous year. The debtor had not disclosed the tax liability on schedules because they were aware that the IRS debt was non dischargeable.

The trustee cleverly asserted that the joint IRS debt exposed the debtor’s TE property to the extent of the tax obligation. The case illustrates that tenants by entireties protection is relatively unreliable in bankruptcy proceedings. I believe it is an exemption of last resort. Debtors often forget to list joint unsecured debts which they are not interested in discharging in bankruptcy. Joint unsecured debts do not affect TE protection outside of bankruptcy in state court collection proceedings.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Rejecting Contracts in Chapter 13

Most Chapter 13 bankruptcies in Florida are filed by people trying to save their home from foreclosure. Another use of Chapter 13 bankruptcy is to void contracts. Chapter 13 rules permit debtors to reject an executory contract. An "executory contract" is any contract where each side has duties remaining to perform. An example is a contract to sell real estate, a lease, or an employment contract.

I am currently involved in a case where the debtor is seeking to reject a contract to sell her homestead because, for various reasons, she feels it is better to keep her family in the house rather than sell the house in move. If a debtor rejects a contract the debtor is liable to the other contractual party for actual damages. The other party is an unsecured creditor who has to file a claim in the bankruptcy case and prove breach of contract and the amount of actual damages due to the debtor’s rejection of the contract.

This particular case has an interesting legal issue. The debtor and her spouse owned the house as tenants by the entireties. Debtor and spouse signed a contract to sell their house. The debtor filed bankruptcy without her spouse and sought to reject the sales contract. The bankruptcy judge held that where there is a contract to sell real estate owned by both spouses, one spouse cannot reject the sales contract in Chapter 13 without the other spouse also filing bankruptcy and joining in the contract rejection.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Filing Fees To Increase

The new Budget bill approved by the U.S. Senate and House of Representatives raised bankruptcy filing fees. The cost of filing a Chapter 7 bankruptcy will rise from $220 to $245, and the cost of filing for Chapter 13 bankruptcy will rise from $150 to $235. Including other fees imposed by the Bankruptcy Act the total cost of filing a Chapter 7 bankruptcy will be $299 and the cost of filing a Chapter 13 bankruptcy will be 274. The new fees do not go into effect until 60 days after the bill was passed, and it still must pass the House one more time, due to edits made by the Senate to avoid violating Senate budget reconciliation rules. Therefore, the exact effective date is not yet certain.

Prior to October 17, 2005, under the old bankruptcy law, the filing fee for Chapter 7 was only $209. Congress has imposed close to a 50% increase in filing fees in one year. The new law’s complexity has caused a substantial increase in fees charged by bankruptcy attorneys.

Doubling Homestead Prior to Filing Bankruptcy

There is a fine line between permissible pre-bankruptcy planning and impermissible fraudulent conveyances. The new bankruptcy law’s homestead rules provide an interesting example. The new bankruptcy law exempts $125,000 of homestead equity acquired within 40 months prior to filing. Homestead interests acquired prior to 40 months, or 1215 days, is exempt in Florida. Most attorneys interpret the new law to double the exemption up to $250,000 where a home is jointly owned by husband and wife where the spouses file a joint bankruptcy petition.

In some cases, a married couple own their homestead in the name of one of the spouses individually. If the spouses faced the prospect of a joint bankruptcy to discharge unsecured debts, transfer of the homestead title to joint ownership prior to filing would increase the permitted exemption to $250,000. The issue is whether such transfer would be undone in bankruptcy because it is a fraudulent conveyance.

I am unaware of any court decisions which have addressed this question. On one hand, as both spouses live in the house joint ownership is expected. Also, such a transfer is not being made to a non-debtor in order to keep the property out of bankruptcy. However, the transfer looks like a fraudulent conveyance to the extent there is no consideration and is made to a family member. If the property was once in joint name before being titled individually, a return to joint ownership may be more easy to defend. I expect that a Chapter 7 trustee would challenge the transfer and the combined homestead exemption, but it is not clear how a court would rule.

posted by Jonathan Alper, asset protection and bankruptcy lawyer, Orlando, Florida

Court Rules Social Security Payment May Be Seized

Social securities payments cannot be garnished under Florida law. Social security income is not counted as income under the means test. However for those people who owe student loans, social security income is at risk. The MSN website recently had an article about a Supreme Court ruling that subjected social security to garnishment for student loan debt. Link: Court: Social Security can be used to pay debt - The Changing Court - MSNBC.com.

People nearing retirement with old and forgotten student loan debt are at risk under this Court ruling. People may find the government waiting to pounce on their social security checks to collect past due student loans. Student loans, tax debt, as well as child support and alimony, are very difficult obligations to evade under bankruptcy and other federal law

posted by Jonthan Alper, asset protection and bankruptcy lawyer, Orlando, Florida

Using 401k Loans To Qualify For Chapter 7

People with financial problems often tap into retirement accounts to pay necessary expenses. Consumers with 401k plans sometimes have the choice of borrowing from their plan or taking distributions. Taking loans, rather than distributions, from a 401k can have advantages if you ultimately have to file Chapter 7 bankruptcy. Distributions trigger some income tax liability and possible early withdrawal penalties. If you file bankruptcy the balance in the 401k would be exempt. If you take a loan from your 401k, the amount of monthly payments to your plan are deductible for purposes of calculating your disposable income under the means test. Sometimes it pays to purposefully take a loan just prior to bankruptcy to pay medical expenses , health insurance, past-due secured debts, and/or bankruptcy attorneys fees in order to show a significant 401k loan payment under the means test calculation. This is an example of how the new law calls for advanced bankruptcy planning for debtors above median income who are therefore subject to means testing.

Home Appreciation Not Subject To Homestead Cap

The new bankruptcy law caps homestead protection at $125,000 for debtors who first acquired a Florida homestead within the past 40 months prior to filing bankruptcy. The American Bankruptcy Institute Blog reports the first case, from a Texas bankruptcy court, which considered whether appreciation in value during the applicable 40 months prior to bankruptcy counts against the cap. Link: ABI's BAPCPA Blog. The case held that only the value of interest acquired by the debtor, excluding appreciation in value, is applicable to the homestead cap.

Consider a hypothetical florida debtor who purchases a homestead for $125,000 41 months before filing. If the home appreciates to $250,000 during the ensuing 40 months, and the debtor then files for Chapter 7 bankruptcy, his homestead will still be exempt in the bankruptcy even though its value is double the amount of the $125,000 homestead cap.

I am not aware of any Florida case which has considered this same issue.

posted by Jonathan Alper, asset protection and bankruptcy lawyer, Orlando, Florida

Definition of "Household" For Means Test

The new bankruptcy law says that you automatically can file for Chapter 7 bankruptcy without further means testing if your average monthly income over the prior six months is below Florida's median income. The applicable median income depends on your household size. Many people are unclear how to determine the size of your household, and particularly, how household size is related to family size. More than one blog reader has asked me questions about household definition. The new bankruptcy law does not make clear the definition of household for determining if a particular debtor is below the applicable median income.

I came across a helpful explanation which was posted on a listserve for bankruptcy lawyers. The post explained:

" A household consists of all people who occupy a housing unit regardless of relationship. A household may consist of a person living alone or multiple unrelated individuals or families living together. Households thus are subdivided into family and nonfamily households.

A housing unit is a house, an apartment, a mobile home or trailer, a group of rooms, or a single room occupied as a separate living quarters, or if vacant, intended for occupancy as separate living quarters. Separate living quarters are those in which the occupants live separately from any other individuals in the building and which have direct access from outside the building or through a common hall. For vacant units, the criteria of separateness and direct access are applied to the intended occupants whenever possible. "

I hope this posted definition helps you understand the size of your household for purposes of the means test under the new bankruptcy law.

posted by Jonathan Alper, asset protection and bankruptcy lawyer, Orlando, Florida