The Florida Bankruptcy Law Blog

Self Employed Business Owners Wants To Reduce Income From His Business In Order To Pass Means Test

Persons considering Chapter 7 bankruptcy must qualify for Chapter 7 under the “means test.” The means tests evaluates your disposable income after expenses. This week a caller asked me if a self-employed person could successfully manipulate income for purposes of the means test. After I explained median income and the means test, this caller stated that he could make his income whatever it needed to be for purposes of filing bankruptcy.

The caller was self employed. If a self employed person wants to file Chapter 7 bankruptcy the means test considers the amount of income the self employed person was paid from his business during the prior six months including salary and profit distributions. The means test does not look at the business’s gross income or business expenses.

The caller proposed that he could retain money in the business rather than pay it to himself as profit distributions in order to lower his personal income prior to filing bankruptcy. He wanted to know if his plan would work.

Parents On Title To Child's Homestead: What Happens When Either Child Or Parents File Chapter 7 Bankruptcy

Homestead protection in bankruptcy gets complicated when there are non-resident co-owners of the debtor’s homestead. An example is when parents help an adult child buy a home and insist on placing their names as co-owners of their child’s house.

A caller from south Florida asked me how a Chapter 7 bankruptcy would affect his homestead owned jointly with his parents free and clear.  His parents purchased a house in Florida for their son. The house was titled jointly in the names of the son, who lives there, and the two parents. All three family members have credit card problems and are considering bankruptcy. The son asked me whether his Chapter 7 bankruptcy would affect is parents’ interest in his house. The house qualifies for unlimited homestead protection under the bankruptcy rules.

If the son files Chapter 7 only the son’s partial interest in the house is at issue. The Chapter 7 trustee has no interest or rights relating to what the parents own including the parents’ interest in the house (if any). The son’s ownership of the house would be exempt as homestead because the house is his primary residence.

Question: Can Chapter 13 Debtor Strip Second Mortgage And Then Covert To Chapter 7 To Wipe Out Unsecured Debt?

Chapter 13 bankruptcy is being used increasingly to modify first and second mortgages on primary residences. Chapter 13 permits debtors to strip off a second mortgage on an upside down property, and a new mortgage mediation program in the Orlando bankruptcy court gives debtors the opportunity to mediate a mortgage modification soon after they file a Chapter 13 bankruptcy. Keep in mind that a Chapter 13 debtor has the option to at any time convert a Chapter 13 to a Chapter 7 liquidation at any time (with minor restrictions).

I received a question by email which I want to address because I suspect other people have the same idea. The question is whether a debtor can with an upside down first mortgage, a second mortgage, and credit card debts can solve all his problems by filing a Chapter 13 bankruptcy, asking immediately for first mortgage mediation, modifying the first mortgage in the mediation, file a motion to strip the second mortgage completely, and then convert the case to a Chapter 7 to wipe out the credit card debts. This plan would be a dream bankruptcy leaving the debtor with a reduced first mortgage payment, no second mortgage, and no credit card debt.

It seems too good to be true, and it is. The problem is that Chapter 13 bankruptcy does not strip a second mortgage unless and until the bankruptcy plan is completed. If a debtor modified his home mortgage in mediation and then converted to a Chapter 7 the second mortgage would remain on the home because the debtor would not have received his Chapter 13 discharge at the end of the Chapter 13 plan. I think a debtor could convert to Chapter 7 after the mortgage modification of the first and/or second mortgage and retain the modified payments because the modification is not part of the bankruptcy proceeding. In other words, this plan may work to modify mortgages and then discharge unsecured debts, but it won’t work to stip a second mortgage in Chapter 13.

Credit Repair After Bankruptcy

One of the major concerns of bankruptcy debtors is their credit rating. Credit ratings, while important to all, are especially important to bankruptcy debtors who usually emerge from bankruptcy with little cash and no assets. They need to reestablish credit as soon as possible in the event they need to buy necessities like a car or appliances for which they cannot pay cash.

I saw a good blog post by Michigan bankruptcy attorney Kurt O’Keefe about what steps people can take to rebuild credit after a bankruptcy. Those readers concerned about credit rehabilitation after bankruptcy can get good advice by reading Mr. O’Keefe’s article.

Debtor Faces Judgment And Bankrutpcy With His Name On Title To His Parents' Home: Will The House Survive?

It happened again- a parent puts their home in their child’s name, and then later a judgment against the child exposes the parent’s home to the child’s creditors. In this instance, a caller stated that his elderly parents living in Miami had  transferred their free-and-clear homestead to the names of their three children. The home was transferred because the parents were afraid one of them would go into an nursing home and that the home would be lost to pay nursing home bills. That never happened- the father died and one of the daughters is living in the home taking care of their mother. The land is titled jointly among the surviving mother, the caller(son) and two sisters. The caller is facing a judgment in New York state. He asked me whether the judgment creditor can force the sale of his parents’ home and whether a bankruptcy trustee would assert a claim against the property if he had to file chapter 7 bankruptcy to wipe out the New York judgment.

Courts have held in most cases that when a parent adds his child’s name to the parent’s property or bank accounts for estate planning purposes the asset’s equitable ownership remains with the parent and the child hold bare legal title. In other words, the asset still belongs to the parent. However, this type of over-simplified estate planning creates a legal mess.

Debtor Titled Business's Work Truck In Debtor's Name For Financing: Will Debtor Lose Truck In Bankruptcy?

Debtors get only a one thousand dollar exemption for cars. This exemption does not go very far when the vehicle in question is a work truck. This past week one of my clients presented to following fact situation. The debtor needed a truck for his business. He found that he could get better financing if he purchased the truck in his personal name rather than the business name. The truck was used exclusively for business. He purchased the truck for all cash with a check from the business’s checking account. He insured the truck with a commercial insurance policy paid by the business, and he depreciated the truck on the business’s income tax return. He wants to know if a Chapter 7 trustee will take his truck.

Divorced Couple Still Lives Together: Does Either Spouse Have To Count Ex-Spouse's Income In Bankruptcy Means Test?

Husband and wife were just divorced, but until they can afford two households they remain living in the same house. They agreed that they would separate their finances. Each spouse pays their own expenses from their own income; they each pay ½ of the mortgage and other property expenses. The wife wants to file bankruptcy before she finds her own residence. She asked me if her bankruptcy analysis needs in include her ex-husband’s income if they are already financially separated and legally divorced.

I understand the rule is that a debtor’s means test includes all income in the household regardless of the relationship of those living in the house, and that therefore, the wife’s household income would include her ex-husband’s earnings. This might appear unfair if the ex-husband’s income is substantially higher than the wife’s earnings and they will be living separately in the future. The wife may deduct from her means test whatever the ex-husband pays toward household expenses. If the ex-husband pays expenses proportionate to his income then the means test result should be reasonably fair for the wife. If the couples respective incomes and actual expense responsibility cause the wife to fail the means test she should wait until she relocates in to her own household before she files bankruptcy.

Totten Trust Or Gift-To-Minors Account: Which Is Exempt In Bankruptcy?

A client established several years ago a bank account to save for his children’s education. The bank opened the account as a Totten Trust. The client said he knew his kids’ account was protected from judgment creditors because I had stated, somewhere on my website, that bank accounts established for children is exempt from creditors and not part of a Chapter 7 bankruptcy estate. I responded that regardless of what he read the proper way to protect children’s money from your creditors is by setting up a bank account under the Uniform Gift to Minors Act (UTMA) rather than a Totten Trust.

A "Totten Trust" is a common law concept that refers to a financial account with money held in trust for another person. Some banks will open accounts for the benefit of other persons as Totten Trust. Florida law considers Totten Trusts to be revocable at will during the grantor’s lifetime. Because the grantor may rescind the trust and receive Totten Trust money, so can the grantor’s creditors capture same funds. Florida bankruptcy attorney Jordan Bublick posted a good explanation of Totten Trusts in his blog.

Interesting Question About Mortgage Foreclosure And Homestead Exemption

A reader submits the following question about homestead protection and foreclosure in a bankruptcy context.

A Florida resident files Chapter 7. His homestead (is situated upon) 2 acres, each legally described as 1 acre lots.　House sits on one acre　with attached acre free and clear.　　If a Ch7 has already been filed　and the house will eventually be lost to foreclosure, can the "attached acre" be sold or kept outside of a bankruptcy given it is now protected by homestead.　

I inferred that the lender’s mortgage is against only the acre where the home is built. The Chapter 7 bankruptcy does not disturb or impair the lender’s mortgage. If the debtor does not keep current the mortgage, or arrange a modification program with the lender, the mortgage lender will take back the secured lot. The Chapter 7 bankruptcy will not strip or modify the mortgage.

The debtor’s homestead exemption covers his residence and up to 160 acres of contiguous property. The contiguous property does not have to be under the same legal description as the lot where the debtor’s home is located. The contiguous 160 acres may be comprised of several different legally described real estate.

Homestead Exemption In Chapter 7 Bankruptcy Does Not Avoid Pre-Existing Judgment Lien

Many bankruptcy clients have complicated lives, and sometimes, their real life stories create interesting bankruptcy law issues. One bankruptcy client asked me this week if she could protect a house under the homestead exemption; the house has a an unusual history. The debtor and her boyfriend lived together in the house six years ago.(House One) The boyfriend paid for and owned the house by himself. Six years ago, in 2004, she and her boyfriend decided to buy and move into a second home (House Two) which they owned jointly. They rented their former residence, House One, for income. In 2006, one of my client’s creditors obtained a judgment against her for $25,000.

In 2007, the couple decided to split up. The boyfriend agreed to convey the legal title to House One to my client, and she signed a quit claim deed to transfer to the boyfriend her interest in House Two. House One and House Two each had mortgages and the two properties had about the same amount of equity in 2007, approximately $50,000 equity each. Now, the client proposes to kick out the month-to-month tenant in House One and move back in. She wants to know if House One would be exempt in bankruptcy as her homestead and whether the homestead would be encumbered by the creditor’s $25,000 judgment in addition to the mortgage.