The Florida Bankruptcy Law Blog

Chapter 7 Trustees Offer Debtors Practical Tips Concerning Valuation And Buy-Backs Of Personal Property

The bankruptcy committee of our local Bar association holds monthly luncheons. At the most recent luncheon two Chapter 7 bankruptcy trustees discussed the bankruptcy process from the trustee’s point of view and offered a few good suggestions to debtors’ attorneys. One of there comments concerned the treatment of debtors’ household furnishings. Florida law provides each debtor with a $1,000 total exemption for all personal property including bank accounts and household furnishings. This exemption is small compared to most other state’s laws. In practice, few trustees pursue personal property valued slightly over the exemption nor challenge property valuations in most Chapter 7 petitions unless there is a clear reason to doubt the debtor’s property list.

At the bar meeting the trustees suggested that the Chapter 7 trustees may be taking a closer look at personal property lists and values. They indicated that most trustees may be sending an appraiser to the debtors homes to take an inventory whenever the debtor’s home is valued more than $500,000. It is hard to believe, they said, that a home worth more than a half million dollars in today’s real estate market contains less than $2,000 (joint filing) of furniture and electronic equipment. The trustees stated that bankruptcy debtors whose homes and personal property lists will likely be scrutinized consider hiring their own appraiser to value their property before they file their petition and submit their own personal property appraisal to the trustee.

Too Strange For Springer, Too Weird For Oprah: Debtors Try To Fix A Messed Up Transaction

Bankruptcy debtors do some strange things. A couple came to see me about a debt they forgot to put in their bankruptcy petition. The husband filed Chapter 7 bankruptcy in 2007 by himself without an attorney. The case is closed; discharge entered. Its in the archives. A year earlier, the husband had tried to sell his motor home to a third party. The husband could not deliver title to the motor home because there was a lien on the home. The agreed sales price was $40,000 but the lien was $60,000. The buyers must have wanted the motor home really badly because they gave the husband the $40,000 as long as he promised to pay off the lien as soon as he could.

The husband gave the entire $40,000 to the bank with the lien. He never could clear or pay off the lien with other money. In the meantime, the bank kept deducting the monthly lien payments from the $40,000 until, a few years later, there was no more money. The husband never spent any of the money on anything but the loan payments.

You can probably guess what happens next. When there was no more money left in the fund to make payments the bank repossessed the motor home from our surprised buyers. The buyers paid the agreed price and thought everything was taken care of. Now, the husband wants me to add the aggrieved buyers to his bankruptcy petition even though the case was closed. There are a couple interesting legal issues.

Tenants By Entireties Exemption May Be Lost Because Of Declining House Value And Second Mortgage

I received an email from a man who was considering Chapter 7 bankruptcy to discharge a substantial amount of credit card debt. The man was married. He and his wife owned joint bank accounts with significant balances. His wife had no credit card debt. The spouses were jointly liable on a first and second mortgages on their primary residence. The house was going into foreclosure. The house value may have declined to an amount which is lower than even the first mortgage balance. Question: can the wife file Chapter 7 bankruptcy and protect their joint bank accounts.

Joint bank accounts are presumed to owned tenants by entireties. All tenants by entireties property is exempt in Chapter 7 bankruptcy of one spouse if the debtor spouse and non-debtor spouse have no joint unsecured debt. Usually, the issue is whether the spouses have joint unsecured credit cards or tax liability. In this case, the non-debtor spouse has no unsecured debt either individually or jointly with the debtor. But, there is a problem.

Court Says Debtor Cannot Use 401k Loan Repayments As Means Test Expense

This week I read a decision from a south Florida bankruptcy court which dealt with a few issues I frequently see in my own bankruptcy practice. Many of my clients have borrowed money from their 401k to help pay their bills before bankruptcy.. The tell me they have to make a minimum amount of loan repayments each month to avoid having to declare the loan balance as a withdrawal subject to income tax. The clients state that their loan repayments are "required" and ask is the minimum monthly loan repayment is deductible as an expense in their means test.

The 401 k payments are not allowable bankruptcy expenses. This bankruptcy judge pointed out that most courts which have previously considered this issue have disallowed 401 k loan repayments as means test expenses. The court followed the majority of opinion and ruled that this debtor’s monthly loan repayments to his own 401 k plan is not permissible as an involuntary expense deduction for means test purposes.

The means test permits debtor to deduct on their means test the money they pay each month for transportation. The law provides for a standard transportation expense. The debtor deducts either the standard expense or proven actual expenses. What happens if a debtor owns a car free and clear? Should debtors with no car payments get the same deductions as other debtors with monthly car debt. This court reported that on this issue there is a heavily litigated split among different appellate courts and bankruptcy courts. Our appellate circuit, the 11^th Circuit, has not ruled on this issue. After reviewing arguments on either side of the issue this bankruptcy court held that the debtor with a car owned outright may deduct the applicable standard monthly allowance for vehicle ownership cost. The case is In re Michael Koch Case No. 08-29122 from the Souther District of Florida.

Prospective Sales Commission Income In Bankruptcy Means Test

An attorney emailed me with a question about a prospective bankruptcy client who is in the real estate sales business. The real estate salesman has a few contracts in the pipeline- sales contracts are signed subject to financing contingency and other conditions. If the sales close the realtor will earn a commissions. The question is whether the salesman has to value and report these future earnings on a Chapter 7 bankruptcy petition either as an asset or as income. The attorney wonders whether the debtor should discount the present value of the future commissions based on their probability and timing.

I think this question depends on the laws pertaining to real estate contracts and brokerage commissions. I consulted another attorney who specializes in real estate law. The real estate attorney explained that the answer depends upon certain unknown facts. If the debtor is a real estate salesman, not a broker, the salesman’s contractual relationship is with his broker. The real estate commission is payable to the broker pursuant to the contract. In that event, the commissions are not a contractual interest and are just possible future earnings that will be earned if an when the sales close. Many debtors have sales jobs, and they typically do not list commissions on deals they are working on before they commissions are earned. All sales people have possible future commissions at any point in time.

If the debtor is a broker the debtor may have a contractual interest in the sales contracts. However, many real estate contracts state that commissions will be due but do not state the amount. In such case, the broker does not have a definite financial right in the real estate contract. Some brokers are paid under an independent broker contact; some broker contracts state that the broker is entitled to some commission when a sales contract is signed in which case this debtor would list the amount as commission income.

There is a general legal principal that real estate commissions are not due and payable until the sales contract has no contingencies. Even after all contract legal conditions are satisfied either party can still breach the contract and no commission would be received (pending a suit for commission). Or, for example, a bank can withdraw a financing commitment. I think there is a valid argument that no commission is earned until the closing. In my own bankruptcy cases I typically do not include prospective commission income on any sale by any commissioned salesperson until closing is certain. I believe that all commissions are speculative until closing. As any sales professional will tell you there are too many things that can kill a deal until the money passes hands.

Bankruptcy Court Requires Reaffirmation Agreement For Homestead Mortgage

Chapter 7 bankruptcy debtors often own cars subject to a car loan and lien. The new bankruptcy law states that debtors must reaffirm loans on all personal property in order to maintain the property through their Chapter 7 bankruptcy. So, debtors who want to keep automobiles must sign a reaffirmation agreement making them personally liable to pay the loan until paid in full. The Chapter 7 bankruptcy discharge will not discharge the debt and will not protect the debtors if they cannot pay the loan after the bankruptcy is closed.

Real property is different. The new bankruptcy law does not expressly require reaffirmation of debts secured by real property such as mortgage debt. Therefore, I have advised my clients not to reaffirm home mortgages in bankruptcy because they were not so required. I did not think debtors should obligate themselves personally on mortgage debt if not legally required to do so. That way, if after their bankruptcy the debtors could not pay the mortgage and had to walk away from their house the mortgage lender could not sue them personally.

A new ruling by an Orlando bankruptcy judged ends the option to "ride through" a mortgage debt. The judge said that if a debtor wants to keep real property after bankruptcy the debtor has to reaffirm their personal obligation to pay the mortgage debt just like they have to do with their cars and other personal property. The judge cited a ruling by the Eleventh Circuit Court of Appeals that debtors mus act to either surrender or reaffirm a debt if the debtor desires to retain the collateral. The judge said the Eleventh Circuit made no distinction between real property and personal property and that no distinction is merited.

Can Trustee Indirectly Attack Homestead Protection By Amending A Trust Agreement

I saw an interesting post by south Florida banrkuptcy attorney Jordan Bublick. I refer many people living in sourth Florida to Mr. Bublick for bankruptcy. The post,  Homestead Held in Revocable Trust, discusses a court decision involing a Chapter 7 debtor who owned his primary residence in a living trust. Many courts in Florida previously held that a home owned by the debtor's living trust qualifies for homestead exemption in bankruptcy. Mr. Bublick reports that thisj judge implied that a Chapter 7 trustee can take over the debtor's rights to amend his living trust and by amending the trust agreement possibly strip homestead protection.

When a debtor files Chapter 7 the Chapter 7 trustee takes over all of the debtor's legal rights and powers. Most living trust agreement reserve to the debtor the right to take property out of trust and the right to amend the trust agreement. A court could find that the debtor's right to amend the trust is not protected by homestead exemptions even if the result of the amendment is to diminish the debtor's homestead rights. In my own opinion, I think this argument would fail because courts very liberally construe homestead protection for the benefit of a debtor's family dependents. In any event, Mr. Bublick makes an interesting point.

Each Spouse Wants To Protect Entireties Asset In Their Joint Chapter 7 Bankruptcy

Where one spouse files Chapter 7 bankruptcy and same debtor and the non-filing spouse has no joint unsecured debts any property owned jointly by the two spouses as tenants by entireties property is exempt and is not part of the bankruptcy estate. There is no entireties protection to the extent of any joint creditors.

Today I met a married couple who were considering bankruptcy. They were unsure if one spouse should file or if the should file jointly. Each spouse had separate debts; no joint unsecured debts. The spouses jointly owned some real estate free and clear. Even in today’s market the properties had significant value. They knew the general entireties rule from reading my website, and they knew if either spouse filed bankruptcy separately the jointly owned real estate would be exempt. They asked me if the result if different if they both file a joint bankruptcy. They assumed that bankruptcy law would not permit spouses to jointly file bankruptcy and protect jointly owned property with equity. Isn’t the joint bankruptcy filing, they asked, the same as having joint unsecured debts?

Court Strips Second Mortgage In Chapter 7 Bankruptcy. Is It Precedent?

Another bankruptcy attorney emailed me asking me for my opinion about a case where an Orlando bankruptcy judged permitted a Chapter 7 debtor to "strip" off a second mortgage on their homestead. The law as I understood it was (and is) that only Chapter 13 debtors can use bankruptcy to strip a second mortgage lien off their homestead. The second mortgage is removed when the debtor successfully completes the Chapter 13 assuming that the house value is equal to or less than the first mortgage balance.

I looked up the case the attorney referred to. Sure enough, it was a Chapter 7 bankruptcy, and the judge issued an order stripping a second mortgage from the residence. The judge did not write an opinion explaining the order. There was no objection filed by the second mortgage lender.

Bankruptcy Not Abusive Where Homestead Mortgage Proceeds Used For Investments

I filed Chapter 7 bankruptcy for a relatively wealthy husband and wife. The debtors passed the means test primarily because they had large mortgages on their residence and a few investment properties. Secured mortgage payments provide income offsets in means test calculations. The debtors lived in a nice house, drove nice cars, and the family enjoyed an annual income over $100,000. As expected, the U.S. Trustee filed a notice of a "b(3)" challenge which means that the U.S. Trustee may consider the Chapter 7 bankruptcy to be an abuse. Bankruptcy courts will dismiss a Chapter 7 bankruptcy as an abuse where the debtor is using bankruptcy to sustain a "lavish" lifestyle at the expense of unsecured creditors. Simply stated, your bankruptcy could be in trouble when your house and your car are nicer than the judge’s and trustee’s houses and cars. In this instance, my clients got lucky.