Florida Bankruptcy Law Blog

How Debtors Were Treated Before Bankruptcy Laws

The Wall Street Journal had an interesting story on January 30, 2006, about the history of bankruptcy laws in the United States. Interesting facts about bankruptcy included the following:

In England before the revolutionary war debtors were imprisoned for failure to pay creditor, and the debtors were made responsible for the cost of their imprisonment. Imprisonment could last a lifetime.

There were debtors prison in America after the Revolutionary War.

Some American colonies bound debtors in service to their creditors for up to seven years as repayment of debt.

Robert Morris, a signer of the Declaration of Independence, was imprisoned in Philadelphia in 1798 for failure to pay debts.

Congress passed the first bankruptcy law in 1800, but then repealed it three years later.

York did not abolish debtors prisons until 1831, and Pennsylvania kept debtors prisons open until 1842.

Tenancy By Entireties Protection in Out of State Bankruptcy

I received an inquiry about a person filing bankruptcy in another state owning a parcel of real property in Florida jointly with his spouse. The state where the bankruptcy was filed does not recognize tenancy by the entireties as a form of ownership exempt from creditors. Is the Florida property subject to sale by the bankruptcy trustee?

This question involves conflicting law between two states, one state which does not recognize tenancy by entireties and Florida where the property is located and where TE property would be exempt in bankruptcy so long as the debtor and spouse do not have joint unsecured debts.

The general conflict rules is that the law applicable to real property is the laws of the state where the property is located. The general bankruptcy rule is that the bankruptcy court applies the laws where the debtor files. My guess is that in this case tenancy by entireties would protect the Florida property from administration in the foreign bankruptcy proceeding, again assuming no joint unsecured debts.

Substantial Abuse Under The New Means Test

Under the new bankruptcy law the "means tests" evaluates eligibility for chapter 7 bankruptcy. The means test measures the debtor’s ability to repay debts by considering his total household income and expenses. Where a single debtor is unemployed, but his spouse is employed and makes substantial salary, the spouse’s salary could disqualify the unemployed debtor from Chapter 7 under means test formula.

I presently am preparing a bankruptcy for such an employed debtor with a gainfully employed spouse. Together, this couple makes a lot of money. However, the bulk of the unemployed debtor’s debts represented credit cards used to fund a failed business. Under the new bankruptcy law, debtor’s whose debts are primarily business debts are exempted from the means test. Therefore, the spouse’s income should not disqualify this debtor from filing chapter 7. However, under the old law a debtor’s bankruptcy might be subject to dismissal if it were found that the filing constituted a "substantial abuse" considering the debtor’s ability to repay debts. The extent to which the income of a non-filing spouse was considered in "substantial abuse" was not clear. This case will be interesting because it will present the issue of whether a debtor exempt from the means test by the business debt exception could still find his bankruptcy challenged as substantial abuse under the new law because of the income of his non-filing spouse.

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

Homestead Protection Denied For Rented Duplex

I had previously written a post about homestead protection of a duplex where one half is owner occupied and the other unit is rented. The issue is whether the constitutional homestead protection includes a rental unit attached to the dwelling where the two units cannot be subdivided. The prior post cited precedent that the constitution protects dwellings and businesses located on the same property outside a municipality but that homestead properties within a municipality are limited to the actual dwelling unit. Other cases have protected dwellings and attached units used for business where the property could not be subdivided.

A recent bankruptcy decision in the Middle District of Florida dealt with the claimed exemption of a debtor’s duplex situated within a municipality . The two units are not legally divisible. The bankruptcy court denied homestead protection of the duplex. The court pointed out prior to 1968 the Florida Constitution protected the residence and business house of the owner, but a 1968 amendment deleted the reference to "business house." Although a minority of prior bankruptcy decisions protected the entire duplex where the units were not divisible the majority of prior bankruptcy cases denied homestead protection to rental units attached to the residence. The court recognized that this ruling may force the debtor to lose the house and speculated that the Florida Legislature may not have contemplated this unfortunate result when drafting and enacting the 1968 amendment to the Constitution. Nevertheless, the court found that denial of homestead protection of that part of the property rented for income is mandated by the law.

There ruling may have been different if the debtor’s duplex was located outside a municipality because, as stated above, courts have previously protected businesses on homesteads located in the county. Secondly, all the cases cited by the bankruptcy court were prior bankruptcy decisions, and state courts may reach a different conclusion when homestead protection of duplexes is considered outside of the bankruptcy context. This was a tough case to decide, and in my humble opinion, the decision was technically correct because the duplex was within a municipality. (Memorandum Opinion, In re: Angela D. Bornstein)

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

Disability Income From Private Disability Insurance

The new partnership law excludes social security disability from computations of monthly income when the debtor determines whether he is under the applicable median income and exempt from means testing. A client today received both social security disability and additional disability income from a private disability insurance policy. As far as I can tell, the private disability is counted in computing his monthly income and means test eligibility. In most cases, people who are receiving disability will not be making enough money overall relative to their expenses to flunk the means test. I would appreciate hearing if my treatment of private disability income is incorrect.

Debtor Education and Last Minute Chapter 13 Filing

A new client hired me today to stop a foreclosure sale of his principal residence. For the first time since the new bankruptcy law, I examined the issue of getting a debtor education certificate on an expedited basis in time to save a house from foreclosure. Many courts around the country have refused to waive debtor education requirements of the new law prior to filing even if the result of dismissing a bankruptcy without the education certificate is the loss of the debtor’s principal residence. Courts have said that if a debtor tries to complete an education course and after five days is unable to find an eligible course that the debtor can file a certificate to that effect and may obtain a waiver. But, this procedure still requires initial attempts to take an education course at least five days before the Chapter 13 case is filed. People who consider bankruptcy less than five days before foreclosure may find it too late to either take the debtor education class or file a certificate in time to save their homes.

The Orlando Chapter 13 office stated that they may themselves be a certified provider of pre-filing debtor education. If this were the case, local debtors may find it easier to quickly obtain an education certificate prior to filing a last-minute Chapter 13 case. When my secretary checked today and found that the local trustee has not yet been certified as a provider of debtor education. For the time being, debtors will have to seek certification from private providers.

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