Florida Bankruptcy Law Blog

Resulting Trust Theory Can Protect Asset Titled With Parent For Estate Planning Purposes

In the past week I received similar questions from three prospective bankruptcy debtors about assets owned jointly with their parents. In each instance, the parent had added the debtor/ child to the parent’s deed, bank account, or CD for estate planning purposes so that the child would immediately have access to the asset upon the parent’s death. I have written previous posts that discussed the problems with joint ownership between parent and child. My guess is that most bankruptcy attorneys tell their clients that when a parent adds a child’s name to the parent’s asset for estate planning the child will lose at least part of the asset if the child files Chapter 7 bankruptcy because the child will be deemed to own part of the land or financial asset. This is not always the case. One of my clients had me research the issue where the parent purchased a house, paid off the mortgage, and then added her child to the title for estate planning purposes.

There are several Florida bankruptcy cases which hold that when a debtor’s name is own the legal title to an asset, which asset was purchased by a parent for the parent’s exclusive use, the debtor is considered to hold their share of legal title in "resulting trust" for the parent. The asset is not part of the debtor’s bankruptcy estate even if the debtor’s name is on the title. The analysis is based on the facts of each case. A result trust is implied under Florida law when the parties intend for one person to have exclusive equitable ownership and control of an asset and the other party claims nothing more than bare legal title. Courts have found a resulting trust when the parent paid exclusively to purchase the asset, exclusively used the asset, and exclusively paid expenses of ownership such as taxes, maintenance and repairs. In such circumstances, courts have said that it would be inequitable for the child debtor’s creditors to attack the parent’s property just because the parent inadvertently added the debtor’s name to the title for estate planning. Many bankruptcy debtors have this issue, and these people should make sure their bankruptcy attorney is familiar with the concept of resulting trust.

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

The Effect of Bankruptcy Or Foreclosure On Your Ability To Qualfiy For Your Next Home Mortgage

One of my recent clients works as a supervisor in the mortgage lending department of a national bank. Many people asked me about the impact of bankruptcy and foreclosure on their credit. I asked this client how many years does someone have to wait to get a new mortgage after either filing Chapter 7 bankruptcy or a foreclosure judgment. My client said that during the real estate boom a bankruptcy or foreclosure meant no mortgages for two years. In today’s lending environment, mortgage companies are not giving new loans to anyone who either filed bankruptcy in the past four years or who had a foreclosure judgment in the prior five years. It does not matter how much cash the debtor can invest in the new home- no mortgages are available during these periods regardless of the down payment and loan to value ratio.  She expected that these requirements will be relaxed somewhat when the real estate market stabilizes.

My client offered advice for people considering bankruptcy. The client suggested that debtors maintain after bankruptcy one or two credit cards that have low balances and for which the debtor is current on payments. If people remain current on some credit cards following bankruptcy (or foreclosure) their credit scores will rebound relatively quickly. Then, if credit loosens up as the economy recovers the people with good credit will more quickly qualify for mortgage or consumer loans.

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

HOA Fees Liability After Bankruptcy

I read an interesting blog post about liability for homeowners association fees after filing Chapter 7 banrkuptcy.I still owe HOA Fees after I filed Bankruptcy and Surrendered my Home? : Bankruptcy Law Network. The new bankruptcy law does not discharge the debtor's liability for debts to an HOA. The author states that as a practical matter debtor's have little to worry about. His reasons and advice to clients is explained in the blog post.

Bankruptcy's Effect On Credit Score: Lender Rebuts Common Myths

Bankruptcy debtors often worry about the effect of a bankruptcy on their credit rating and their ability to finance new cars and homes after filing bankruptcy. The consensus opinion of my clients is that a Chapter 7 bankruptcy ruins your credit and that a Chapter 13 bankruptcy has less adverse impact on credit. One of my clients this week owns a company that buys automobile finance contracts. This client is not filing bankruptcy. His company purchases debt from other companies making sub-prime auto loans, companies such as buy-here-pay-here lots and payday loan businesses. He says that the debt packages he buys always includes loans made to people with prior bankruptcies. He knows the effect of bankruptcy on credit ratings. He told me there are two prevailing myths about bankruptcy and your credit score.

The first myth is that Chapter 7 bankruptcy always destroys your credit. He says the main credit factor following bankruptcy is the debtor’s debt history just prior to filing bankruptcy. If the debtor files early, when he first anticipates financial problems, the debtor may then be current on all debt accounts. If there are no, or few, delinquencies on the filing date, the bankruptcy will have no adverse effect on credit. In fact, my client said, that the bankruptcy will improve those debtor’s credit ratings because it will improve their income/debt ratios. The client says that debt/income is more important than bankruptcy for credit score. If, as too often happens, debtors avoid bankruptcy until they are seriously delinquent on their debt accounts the bankruptcy will not improve, and may hurt, the debtor’s credit rating. The bankruptcy debtor’s credit will suffer more from pre-filing delinquencies than from the bankruptcy itself. The lesson is to file bankruptcy when your accounts are still current.

The second credit myth is that Chapter 13 has less impact on credit than Chapter 7 because the debtor is repaying some of his debt. My client stated  that lenders are less likely to finance debtors in Chapter 13 because the debtor has not eliminated his debts and usually has still a below standard debt/income ratio. The fact that the Chapter 13 debtor is repaying his debts in the bankruptcy does not convince my client’s lenders to provide preferred financing.

Some callers ask me if they have to be delinquent a specific number of months on their unsecured debt in order to qualify for Chapter 7 bankruptcy. The answer is "no" and based on this client’s experiences in the lending industry the more you wait for bankruptcy the worse is its impact on credit.

Can Small Business Survive Owner's Personal Bankruptcy?

Many bankruptcy clients during the current recession own a small businesse, and they are concerned about the impact of their personal bankruptcy on their business. Can they continue to own and operate their small business while filing personal bankruptcy to discharge personal credit card and other unsecured debts. In most cases, their business will survive. In a typical business-owner bankruptcy the debtor’s business is not providing enough income to service the owner’s personal debts. The business may have customers and a few assets, but the business usually also has debts owed to suppliers and the business landlord. Most small business weakened by the recession are technically insolvent because whatever assets it owns is less than its liabilities. In a personal bankruptcy the debtor’s "business assets" is not those assets owned by the business; the owner’s asset is his stock or other interest in the business. If the owner states that his interest in his own business has no market value, then the debtor lists his stock on his individual petition at zero.

If an independent third part would not pay to purchase the debtor’s interest in the business, then the bankruptcy trustee likely is not going to be able to liquidate the stock and would not anticipate recovering from the business any money to pay the debtor’s personal creditors. The trustee will not pursue the debtor’s stock in his business if the stock has no value. If a bankruptcy trustee does not want the stock for benefit of the creditors, the debtor may retain his stock and continue to operate his business. Of course, the business’ own creditors can pursue assets owned by the business. The debtor’s individual bankruptcy does not stop business creditors, provide the business creditors cannot pursue the debtor personally. Nevertheless, if the business can make money to survive after the debtor’s personal bankruptcy, the debtor would retain the benefit therefrom.

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

Can Debtors File Bankruptcy in Florida While Caring For Parents in Another State?

In the past month two prospective bankruptcy clients presented the same issue with similar facts. The debtors had moved to Florida in the past year and rented apartments intending to get a job and reside in Florida. Soon thereafter, the debtors each had parents living outside Florida who suffered medical problems requiring ongoing care. The debtor’s moved in with their parents outside of Florida. Because they debtor’s job search had been interrupted by their parent’s illnesses they had continued to accumulate credit card debt which they could not repay. They wanted to file bankruptcy in Florida. They asked if they should be filing in Florida even though they currently resided with their parents in different states.

The debtors should file where they permanently reside. If they currently intend Florida to be their permanent home then they file in Florida. Both debtors stated they hold Florida drivers licenses and have licences in no other state. They listed their Florida address on their 2008 federal tax return. Because they moved to Florida less than two years ago the exemptions applicable to their bankruptcies are the exemptions of the state they moved from (assuming they were in that state for two years or more). I think they file in Florida even though they current reside (on a temporary basis) in their parents’ home states.

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

Bankruptcy Attorney Doesn’t Return My Phone Calls

I found an interesting article about bankruptcy law practice written by a Oregon bankruptcy attorney named Karen Oakes. My Bankruptcy Attorney Doesn’t Return My Phone Calls. Why? : Bankruptcy Law Network.

All attorneys , not just bankruptcy attorneys, are reminded frequently by their professional associations that that clients’ most frequent complaint about attorneys is the latter’s failure to promptly return phone calls. Ms. Oakes points out why many attorneys who practice bankruptcy cannot return all client calls as promptly as their clients would like. Her explanations do not excuse attorneys who purposefully avoid client contact or those attorneys who feel so important that they do not have to respond to their clients. Yet, she correctly points out, I think , that bankruptcy attorneys too are affected when a recession creates economic stress and an increases in bankruptcy filings.

The bankruptcy attorney’s most important task is properly performing professional legal services connected with your bankruptcy filing. Busy attorneys are usually competent attorneys, and those attorneys, like Ms. Oakes, cannot perform their professional tasks profitably and also personally answer every inquiry about the bankruptcy process. Your bankruptcy attorney should respond to any legal emergency; however, clients need to understand that their anxiety about bankruptcy is not a legal emergency. You should expect that the attorney or someone from his office will respond to your questions in about 24 hours, except if staff is on vacation or out sick. As Ms. Oakes says, if you do not receive a timely response leave a another message making sure you state (politely) that it is a second request.

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

Can Debtor Claim Homestead After Moving Into Assisted Living Facility?

Today, I responded to a caller who was considering filing Chapter 7 bankruptcy for his elderly parent. The parent owns a house in Florida free and clear of any mortgage debt. The parent suffers from dementia. The family moved the parent to an assisted living facility outside of Florida. The family rented the parent’s house with a one year lease. The caller states that the parent’s doctors believe the parent’s mental condition is actually improving with medication, and that the parent may be able to once again live independently in the Florida home. The caller wanted to know if the parent’s house would be protected in a Chapter 7 bankruptcy in Florida.

To protect a homestead in bankruptcy the debtor has to maintain the property as a primary residence. The debtor can be living elsewhere when he files if the debtor intends to return to the property and still considers the property to be his home. Whether an out-of-state debtor has the intent to retain a Florida property as their homestead is a case-by-case factual issue. In this case, the parent’s rental for a full year combined with the medical uncertainty would weigh against Florida residency and homestead protection. The parent may wish or hope to return to Florida, but it is unlikely the parent could show unequivocal plans to return at any particular time. The parent also would have a stronger case if the Florida house were rented monthly. To me, these facts suggest the parent left their home expecting to remain in assisted living and rented the property more to maximize income than to retain flexibility of personal use. I think the parent would lose the homestead fight.

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

Is Repayment To Friend Prior To Bankruptcy An Impermissible Preference?

Bankruptcy is designed to treat all creditors equally. If a debtor favors particular creditors by paying the preferred creditor just before filing bankruptcy the bankruptcy trustee can force the preferred creditor to give back the money for equal distribution to all the creditors. The look-back period for preferential payments is 90 days for general creditors and one year for creditors who are "insiders." Most often, the preference issue comes up when a debtor repays a family member or business partner within the one year preference period because the debtor feels a moral obligation to pay the family member or partner ahead of unrelated creditors. This past week a client described a repayment of a loan from a good friend. Debtor and the friend had known each other for over 20 years and had in the past several business dealings, although they were not currently business partners in any venture. The issue presented is whether repaying a loan to a good friend within one year of filing bankruptcy is subject to reversal and recoupment as an improper preference.

I found several cases in Florida and elsewhere dealing with repayment of loans to friends. Most courts agree that whether or not a repayment to a friend constitutes an improper preference depends on the facts of each case and each relationship. The bankruptcy code defines an "insider" as a family member or a closely held business. Most bankruptcy court strictly interpreted the "insider" definition and have held that repayment of loans to friends between 90 days and one year prior to bankruptcy are not preferences. However, some courts have stated that friends are insiders for purposes of preference payments where the debtor and friend are living as a de facto family unit with a romantic relationship or close financial association; payments to live-in boyfriends or girlfriends are preferences. In most cases, the preferential repayment to someone who is nothing more than an unrelated personal friend is not a preference if made more than 90 days prior to filing a bankruptcy petition.

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

Possible Limit On IRA Exemption In Florida Bankruptcy Cases

Someone asked me this week if Florida’s unlimited creditor exemption of IRA accounts applies in bankruptcy court. After looking at the provisions of the 2005 bankruptcy law I concluded that the unlimited IRA exemption may not apply when someone files bankruptcy in Florida. Bankruptcy law has a set of default property exemptions in Bankruptcy Code section 522 (d). These exemptions, however, do not apply to Florida bankruptcy debtors because Florida has "opted out" of the 522 (d) exemptions and substituted its own set of property exemptions including an unlimited IRA exemption. However, another sections of the 2005 bankruptcy law, Section 522 (n) places a cap on IRA exemptions in bankruptcy of approximately $1 million. Florida has not opted out of Section 522(n) so I expect that the $1 million IRA cap would apply even though Florida has chosen to opt out of the default exemptions in 522(d).

I have not had this issue in any of my cases. In the first place, few bankruptcy debtors have $1 million IRA accounts, especially now after the stock market collapse of 2008. Most bankruptcy debtors will deplete a large IRA before filing bankruptcy in an attempt to pay their debts. Additionally, the bankruptcy code provides exceptions to the $ 1 million IRA cap.

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