Florida Bankruptcy Law Blog

Cash Value Life Insurance Owned Jointly With Non-Filing Spouse

The cash value of a life insurance contract may be exempt under Florida law. Cash value life insurance is exempt only to the extent of life insurance owned by the debtor insuring his own life. The exemption does not hinge on whether to debtor, his estate, or some other person is the beneficiary of the insurance policy. If a debtor purchases life insurance on the life of another person, such as his spouse, the cash value of such policy is not exempt under Florida law. A prospective bankruptcy client (husband) stated that he and his non-filing spouse own two separate life insurance policies with cash value; one policy insures the debtor’s life and the other policy insures the life of the non-filing spouse. The two policies have equal death benefits and cash value. The debtor ask is the cash value of each policy is exempt or is non-exempt property which will be taken by the bankruptcy trustee.

The debtor has a 50% interest in the cash value of both life insurance policies. The debtor’s 50% interest in the cash value of the policy insuring his own life is exempt. The wife’s interest in either policy is not part of the debtor’s bankruptcy estate. The cash value of the policy insuring his spouse is not exempt because it does not insure the debtor’s own life.. As the debtor owns only 50% of the cash value of the policy on his wife only 50% of the value is part of his bankruptcy estate. However, the debtor could argue that the cash value of the policy on his wife, owned jointly with his wife, is tenants by entireties property. If he and his wife have no joint unsecured debts all of the debtor’s tenants by entireties property is exempt in Florida. I am not aware of any case which exempted cash value life insurance as a T by E asset.

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

Trustee Pursues Next Year's Tax Refund This Year

In previous years Chapter 7 trustees would inquire about debtors’ income tax refunds after the first of the year through May or June. They would ask if the debtors had filed their tax returns, if they had received a refund which was still in their bank accounts, and if they had not filed, whether they expected a tax refund when they would file. If they had not filed taxes for the prior year the Chapter 7 trustee most often would ask the debtors to provide the trustee a copy of their tax return when it was filed. Thought the second half of a calendar year most trustees, in my experience, did not ask debtors about tax refunds. Some trustees are getting more aggressive

I attended a meeting of creditors this week where the Chapter 7 trustee made the debtors sign an agreement to provide their 2008 tax return when it was filed in 2009. Debtors who attend trustee/creditor meetings in August probably filed bankruptcy in July. If they receive a significant tax refund for 2008 the proportionate amount of refund allocated to income prior to filing bankruptcy in 2007 may be property of the bankruptcy estate. Not all trustees are pursuing refunds from next year’s tax returns, but debtors should be aware that a trustee may want to see next year’s tax return.

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

Person Earning $25,000 Per Month Wants To File Chapter 7 Bankruptcy

Most people would agree that a person who makes $25,000 per month should not be able to discharge his unsecured debts in a Chapter 7 bankruptcy. One such high-earning individual came to my office to discharge over $1million of unsecured debts. The unsecured debts were mostly business lines of credit used to finance his wholly owned real estate corporation. Because of the real estate crash, his business was insolvent. This person also owed substantial back taxes and gambling debts. He had little or no non-exempt assets. The "means test" enacted in the 2005 bankruptcy law was supposed to prevent Chapter 7 bankruptcy by people who could afford to pay a significant portion of their debts. This client can afford to pay his monthly debt service. Can a person earning $300,000 per year wipe out his debt obligations?

In this case, I think the client may qualify for Chapter 7 bankruptcy. The means test does not apply to all debtors. The means test applies only to those debtors whose debts are "primarily" consumer debts. Consumer debts include credit cards for personal use, home mortgages, and car loans. For this individual, I think that gambling debt, although dischargeable in bankruptcy, is also a consumer debt. However, business lines of credit, taxes, and credit card debt incurred by a business but guaranteed by the individual are usually not consumer debts. When I added up this debtor’s obligations I found that most of his debt was not consumer debt. His bankruptcy is not subject to means testing.

The debtor is not "home free." Many U.S. Trustees would challenge this bankruptcy as abusive because the debtor has substantial net income each month available to pay his debts. Others have argued that the means test is the exclusive measure of financially abusive Chapter 7 filings and that people who are exempt from the means test can file Chapter 7 bankruptcy regardless of income. I don’t believe this issue is decided definitively by bankruptcy courts. My experience is that high-income Chapter 7 debtors exempt from means testing draw extensive scrutiny from bankruptcy trustees. The trustee tends to examine all aspects of these Chapter 7 cases much more closely and requires extensive substantiating documents. People who make a lot of money tend to have a lot of assets; high-income Chapter 7 debtors exempt from means testing should be very careful to report all income and all assets.

Bankruptcy court is not a friendly environment for wealthy people. I usually advise clients with large amounts of assets (even exempt assets) or large amounts of income to avoid bankruptcy if at all possible.

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

Does Creditor Commit Fraud By Using Credit Card and Filing Bankruptcy Soon Thereafter?

Many debtors express concern that a creditor will say they were defrauded when the debtor used the credit card filed bankruptcy wiping out the debt. I am often asked how far back will creditors look in deciding whether use of a credit card was fraudulent because the debtor did not have the intent or ability to repay the loan. Here is an interesting discussion of that question on another banruptcy website. Link: If I Charge On My Credit Card And Don’t Make A Payment, Is This Fraud? : Bankruptcy Law Network.

Appeals Court Upholds Discharge Denial For Homestead Purchase and Improvement Shortly Before Bankruptcy

Purchasing a homestead in Florida shortly prior to filing bankruptcy could be deemed a fraudulent transfer and lead to a denial of your bankruptcy discharge. Purchasing or improving a Florida homestead and then filing bankruptcy soon thereafter is, by itself, not grounds for discharge denial or sanction. Only where the debtor evidences fraudulent intent in the transaction may the homestead purchase have bad consequences in an ensuing bankruptcy. The importance of demonstrable fraudulent intent separate from the homestead purchase just prior to bankruptcy is illustrated in a recent decision by the Eleventh Circuit Court of Appeals in a Florida bankruptcy case.

The facts in the bankruptcy of Bruce Jennings are summarized as follows. (Bkr Case No. 03-4926-JAF). A California lawsuit was filed against Jennings in 2001, and the trial was scheduled in May, 2003. In 2002 Jennings purchased a Florida homestead for $1 million and moved to Florida. In 2002, he invested $100,000 in refurbishing the house. Late 2002, he contracted with a builder to expand a hanger adjacent to the house for a total price of $200,000 with a $50,000 initial payment. In April, 2003, the California jury found Jennings liable for damages. Shortly thereafter, Jennings paid his builder $130,000 toward the hanger project even though no money was then due under their contact other than the initial $50,000 payment.

The appeals court stated that the sequence of events was insufficient to establish, by themselves, that Jennings intended to defraud his creditors. Even though Jennings purchased a Florida homestead after he was sued and refurbished and expanded the home after purchase a during the lawsuit, the court said the actions could be explained by considerations and motives other than creditor fraud. However, what convinced both the bankruptcy court and the appellate court was the debtor’s "lack of candor" during the trial when he was asked to give his explanations. While there were possible defensible explanations, the courts found that Jennings explanations were not credible.

I was surprised how much leeway the court extended to the purchase and improvement of a Florida homestead after a lawsuit was filed and within a year or two of filing bankruptcy. Apparently, just because a debtor invests large amounts of money in a Florida homestead is not per se fraudulent if there are credible reasons other than evasion of creditors. (21 Fla. L. Weekly Fed. C206).

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