Florida Bankruptcy Law Blog

Importance of Completing Financial Management Course

The Court's enforcement of the education requirements of the new bankruptcy law are starting to have an adverse effect on many unwary and procrastinating debtors. Most debtors are diligent in completing the pre-filing education course. Many of these same debtors, however, are forgetting that they need a financial management course certificate after they file bankruptcy in order to have their debts discharged. Debtors who do not take the financial management course, or who take the course and don’t return their certificates for filing, face their case being closed without a discharge. In such event, the debtor must reopen the case and pay a filing fee for the purpose of filing the certificate of completion of the financial management course in order to clear his unsecured debts.

Typically, debtors forget to take the financial management course because they don’t read, or they don’t take seriously, instructions they receive from their own attorney. For example, my office reminds our clients in writing two or three times during the bankruptcy process of the importance of completing a financial management course. Nevertheless, too many people are neglecting to take the financial management education course, or they don't return the certificates for filing. As a result, they are facing additional costs and fees in their bankruptcy.

A successful bankruptcy is a partnership between the client/debtor and the attorneys office. The attorneys role is to provide legal services and advice to help the client, but ultimately, the client is responsible for his own bankruptcy. In my opinion, those debtors who accept their responsibilities in the bankruptcy process  have the best chance of taking responsibility for their financial success after bankruptcy.

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

Is Means Test Required For Primarily Business Debt Bankruptcies?

A frequent cause of Chapter 7 bankruptcy is using credit cards to finance the start a small business that ultimately fails. The business owner is left with reduced income from the unsuccessful business and a mountain of credit card debt used to support the business. The means test applicable to Chapter 7 bankruptcy applies to debtors whose debts are primarily consumer debts. Debtors facing insolvency because of business debts do not have to pass the means test in order to qualify for Chapter 7. A separate question is whether these debtors have to go through a means test analysis and file the means test results. Is a Chapter 7 bankruptcy subject to dismissal for failure to file a means test even though debts are primarily business debts and the means test results are inapplicable to the debtor’s eligibility for bankruptcy.

This issues was addressed to me by a bankruptcy judge. My client’s debts were almost exclusively business debts, and we did not file a means test analysis. The court initially dismissed the case for failure to comply with filing requirements.. In this case, the court allowed my client to reinstate his bankruptcy subject to filing a means test analysis. The judge did not issue a ruling on the issued posed above but said that it was an interesting issue and pointed out that two bankruptcy courts in Texas have ruled that filing a means test analysis is required in all Chapter 7 bankruptcies whether or not debts are primarily consumer debts.

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

Question From Reader About Attorneys Fees

I often get questions from readers, including attorneys, to which I do not feel able to respond fully and accurately.  In such cases, I post the questions and invite answers for the benefit of the reader and myself. Here is one such inquiry:

"As a fairly experienced workers’ comp. attorney and a relative "newbie" as a bankruptcy practitioner (2 years), I have a question regarding debtor attorney fees. Obviously aware of Bethea and related decisions on the issue, would the courts be receptive to a fee agreement allowing debtor attorney fees to be paid out of a client’s future workers’ compensation settlement, assuming the client has an open w/c claim at the time of the Petition being filed? Such an agreement would also include language waiving the attorney fee lien for the debtor if attorney is unable to achieve a settlement in the w/c claim. Essentially, the attorney would maintain a lien on exempt proceeds"

I invite responses to the above question.

Post Filing Inheritance Situation

If a Chapter 7 debtor receives an inheritance, or is entitled to an inheritance, from an estate or living trust within six months after filing bankruptcy then the inheritance is part of the bankruptcy estate. The trustee can claim the inheritance and distribute the money to pay the debtors’ unsecured creditors. At a meeting of creditors, one of my clients told the trustee that a relative was ill and that he/she was a beneficiary of the relative’s living trust. The trustee explained that if the relative died in the near future, within the six month period, the debtor was to notify the trustee of any inheritance. The debtor proceeded to tell the ill relative that the inheritance was in jeopardy. The ill relative, still mentally competent, asked his attorney to amend the living trust to make the debtor’s spouse a substitute beneficiary. The relative died within six months of the bankruptcy. The question asked was whether the debtor still had to notify the trustee of the death.

This interesting question involves both bankruptcy and estate planning law. The transaction at first appears to be an improper device to defeat the rights of a bankruptcy trustee and the debtor’s creditors. Yet, who did something wrong and who may be liable. The debtor was not precluded from explaining the situation to a relative. Under estate planning law, any competent person may change their will or trust at any time. The bankruptcy trustee took no steps to perfect any rights in the inheritance. The relative is not part of the bankruptcy case. The estate planning attorney has a duty to his client to make changes in the will or trust, especially assuming he did not know about the debtor’s bankruptcy. Nevertheless, it does not seem right.

I’m not sure of the answer here, but I think the debtor has a legitimate position that he/she is not obligated to inform the trustee of what is now her spouse’s inheritance. The problem for the debtor is that the spouse has full control over the funds. It may be different if there is an agreement between the spouse’s that the inheriting spouse is acting as an agent or nominee for the debtor in which case there may be a possible claim of fraud unless the inheritance is disclosed.

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

Penalties and Interest on Employment Taxes

Employment tax liability cannot be discharged in Chapter 7 bankruptcy. If you are liable to the IRS for payment of employment taxes collected by your company you cannot wipe out your IRS debt by filing bankruptcy. A caller asked whether interest and penalties on past due employment taxes can be discharged even though the base tax liability must still be paid.

I believe the answer is that interest and penalties cannot be discharged for employment taxation. The general rule is that if any tax liability to the IRS is nondischargeable in bankruptcy, the interest and penalties on such debt is also not dischargeable.

Who Is Entitled to Post-Filing Value Appreciation?

What happens if an asset owned by the bankruptcy debtor appreciates in value after the bankruptcy is filed? I received an email from a debtor in Arizona who complained that his Chapter 7 Trustee would not credit him with post-filing appreciation in a non-exempt asset which was part of the bankruptcy estate. He believes that all the Chapter 7 trustee is entitled to is the value of estate assets on filing date. I think the debtor is incorrect, although I have never heard anyone raise this issue.

I think this debtor is confusing two concepts about what constitutes a Chapter 7 bankruptcy estate. The bankruptcy estate consist of all assets, including rights, powers, and equitable interests, which the debtor has on the date of filing. If the debtor acquires new assets after filing bankruptcy those new assets belong to the debtor and not to the Chapter 7 trustee. However, if an asset of the estate appreciates in value during the administration of the bankruptcy estate I do not believe the Trustee or the creditors are limited to the value on filing date or that they owe back to the debtor any amounts of post-filing passive appreciation.

On the other hand, if the issue is whether the value of a bankruptcy asset is above or below a dollar exemption limit, I understand that value on date of filing is the controlling value. For instance, if a debtor owns a homestead which is worth $125,000 at the time of filing, and if the applicable homestead exemption is $125,000, the homestead is exempt even if it appreciates in value after the filing date. The above represents my understanding; please tell me if its incorrect.

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