The Florida Bankruptcy Law Blog

Repayments Of Retirement Plan Loans As Means Test Expense

Many bankruptcy debtor have borrowed money from their retirement plans in an attempt to pay their monthly debt obligations and avoid bankruptcy. The retirement loans require repayment within a certain time in order to avoid income taxation including penalties. When those debtors do file bankruptcy they often suggest that their required loan repayments to their retirement plan be considered as necessary expenses when they calculate their means test eligibility. 

Florida bankruptcy courts allow Chapter 7 debtors to deduct from income all expenses which are reasonably necessary for the support and maintenance of the debtor and family. Payments to the debtor’s own retirement accounts are essentially payments to the debtor himself. Courts have stated that payments or contributions to financial account for the debtor’s own future benefit are not reasonably necessary for the maintenance and support of the debtor and dependants. 

Therefore, if you have borrowed money from your retirement to avoid bankruptcy you cannot deduct loan repayments in your qualification for a subsequent Chapter 7. Although it is morally laudable to use all your financial resources to pay your debts and avoid bankruptcy, my general advice to debtors is that they neither spend nor borrow retirement money to pay their unsecured creditors unless you are sure that using retirement money will solve your debt problems.  

Chapter 7 Bankruptcy Consequences For Earned Income Tax Credit And Child Tax Credit

Income tax refunds are part of the Chapter 7 debtor’s bankruptcy estate. Debtors who file Chapter 7 bankruptcy during the first four months of the calendar year and in November or December of the proceeding year should expect the Chapter 7 trustee to inquire about their anticipated income tax refund. In most cases, the debtor must agree in writing to send a copy of yet unfiled tax returns to the trustee and to hold any refund received until the trustee decides whether or not the refund is significant enough to administer for the creditors’ benefit.

Chapter 7 debtors can exclude or exempt whatever  part of an income tax refund is attributable to the earned income tax credit.  Most Chapter 7 debtors have low amounts of income relative to their family size, and therefore, many debtors received some EITC as part of a tax refund. Florida statutes exempt the EITC from creditors. The Chapter 7 trustee cannot take whatever part of a debtor’s tax refund which represents the EITC.

Chapter Means Test Interpreted Liberally By Court To Permit Debtors' Expense Deductions For Three Cars

Car related expenses are important deductions in the means test analysis. A debtor’s car expenses, including car payments and car operation expenses, often determine whether a prospective bankruptcy debtor passes a means test analysis for bankruptcy eligibility.

Means test calculation are technical and complicated. I infrequently comment on details of means test computations. However, I read a case dealing with the means test that may interesting to future bankruptcy debtors as well as “means test geeks.”

The case involved a large family which owned and operated three cars. Two cars were paid for, and one car was owned free and clear. The husband filed bankruptcy. The husband’s means test included ownership expense for the two cars with payments and operation expenses for all three cars.

The bankruptcy trustee objected to the debtor’s ownership expense for the third car owned free and clear because IRS expense guidelines applicable to the means test refer to car expenses for only two cars. These expense guidelines are calculated and used by the IRS in calculating tax payment plans.

Court Rebukes Chapter 7 Trustee's Attack On Debtors' Upside Down Homestead

I’ve written recently about some Chapter 7 trustees trying to take or administer  “upside down” homestead properties when the bankruptcy debtor chooses not to claim a homestead exemption because their home has no equity. The debtors purposefully avoid claiming the homestead exemption in order to then qualify for the $4,000 wildcard exemption that they can employ to protect cars and other personal property. Some trustees argue that since they can administer for the benefit of creditors all non-exempt debtor property they have the right to get money from the debtor’s homestead by, for example, making the debtors pay rent or by forcing a short sale of the upside down home.

A bankruptcy judge in south Florida rebuked a Chapter 7 trustee who wanted to take the upside down homestead and make the debtors pay rent to live there. The trustee would collect rent but let the mortgage go into default. The trustee would then distribute rent collected to the unsecured creditors until the inevitable foreclosure.

The debtors in this case tried to save  their upside down home from a Chapter 7 trustee by converting to Chapter 13.  The Chapter 7 trustee tried to block the conversion; he argued that if the debtors wanted to save their homestead they should claim the homestead exemption and forfeit the wildcard exemption that had been protecting their cars. He said the debtors’ conversion was in bad faith.

Amending Bankruptcy Exemptions : Court Says Its Never Too Late To Change

Debtors may want to amend their exemption plan (on Schedule C) for several reasons during their bankruptcy case. For example, the debtors may find it advantageous to shift their exemption limits from one asset to another asset to make sure preferred assets are completely covered by exemptions. If the  valuation of one or more assets becomes an issue a debtor may want to remove an exemption from one asset to fully protected the increased value of another asset. A Florida bankruptcy court recently addressed the issue of whether or not there are time limits during a Chapter 7 bankruptcy to the debtor’s right to amend his exemptions.

In this case a joint debtors’ s initial bankruptcy petition claimed a homestead exemption on their primary residence. They apparently thought they could afford to keep their home.  Because they claimed a homestead exemption these debtors were not eligible for the $4,000 wildcard exemption. These debtors had non-exempt personal property over and above their $1,000 personal property exemption allowance.

A trustee has 30 days after the creditor meeting to object to a debtor’s exemptions. This trustee did not file an objection to the debtor’s homestead exemption or any other exempt property.

After the 30 day objection period the joint debtors decided that they would surrender their home to their mortgage company. They filed amended bankruptcy schedules which indicated their intent to surrender the homestead, and on schedule C they omitted the homestead exemption. Without the homestead exemption claim the debtors were able to claim a combined $8,000 of wildcard exemption which they applied to protect their previously non-exempt property which property would have to be surrendered or repurchased from the trustee.

The Trustee objected to the changed exemption plan. He said the debtors could not change their exemption plan in this case after the trustee had made no objection during his 30 day challenge window.

Credit Repair After Bankruptcy

I receive many questions about credit repair after filing bankruptcy. Credit scoring and reporting is not a bankruptcy law issue; it is more a matter of personal finance. What follows is a Guest Post of Mr. Ed O'Brien who works in the are of personal credit, and who maintains a website on the subject.

"It’s no secret that bankruptcy wreaks havoc on your credit. Based on bankruptcy and credit reporting law, bankruptcy can be listed on your credit report for up to 10 years. In the meantime, you’ll find it hard to get approved for new credit cards and loans. You don’t have to wait the full 10 years to start getting credit again, and you shouldn’t, since there are techniques to repair your credit after bankruptcy.

 Credit reporting law allows accurate information to be listed on your credit report, so trying to remove a legitimate bankruptcy from your credit report prematurely will be a waste. You should, however, check your credit report to make sure your bankruptcy is reported accurately. Accounts that were discharged in bankruptcy should reflect a $0 balance and bankruptcy status. Otherwise, it looks like you have outstanding delinquent debt. If a discharged account isn’t reported accurately, you can dispute it with the credit bureau.

 Next, you should get new credit within a year or two after your bankruptcy discharge. Skip regular credit cards completely because you’ll undoubtedly be denied. Instead, apply for a secured credit card which is a type of credit card that requires you to make a security deposit against the credit limit before you can be approved. The security deposit is the creditor’s guarantee that you won’t default on the balance. The creditor can use your security deposit if you default or file bankruptcy again. But, if you use your credit card responsibly and make all your payments on time for several months, you can get your deposit back.

Some secured credit cards will start you out with a credit limit as low as $100. That’s not much of a credit limit so make it your goal to save up $500 that you can use to get your first secured credit card after bankruptcy. Choose wisely because many secured credit cards charge high annual fees and interest rates. Shop around just like you would for a regular credit card.

 Use your card, but use it wisely. Avoid the mistakes that led you to bankruptcy. Keep your balance low, ideally below 30% of your credit limit, and pay it off before the due date every month. Doing this begins to re-establish a positive payment history on your credit report. A history of timely payments will improve your credit – payment history is 35% of your FICO score. Staying out of debt will also help since your level of debt is 30% of your FICO score.

 Don’t neglect the financial basics which play a key part in your credit health. Managing your money well is a prerequisite to building good credit. Create a budget for your income and stick to it as you spend throughout the month. Make sure you’re not overbooking your financial commitments and you’ll be less likely to rely on your credit cards to get you through.

 Credit repair takes time, especially after a bankruptcy. Keep taking the right steps, making timely payments on a few credit lines with low balances and your score will improve."

 Ed O’Brien is a seasoned writer in personal finance, specializing in credit repair. You can find more of his articles located at CreditRepair.org.

 

 

Means Test Deductions Do Not Include Mortgage Payments For Surrendered Property

The Chapter 7  means test permits debtors to deduct from income the amounts of the debtor’s monthly mortgage payments. Many people who are walking away  from upside down mortgaged property file bankruptcy because they want to wipe out liability for a mortgage deficiency claim. The debtor would properly state on his bankruptcy petition his intent to surrender the upside down property. The debtor will have  greater disposable income after he ceases mortgage payments on the  surrendered property as the standard housing deduction from income is usually much less than typical mortgage payments.

A recent Florida bankruptcy case considered this question regarding a debtor’s mortgage expense in his means test calculation: if a debtor intends to surrender a mortgaged property may the debtor still deduct the mortgage payments amounts in the means test calculation. The debtor argued that his mortgage payment deduction is property as long as the debtor is contractually obligated to pay the mortgage. The court disagreed and dismissed the Chapter 7 filing.

Chapter 7 Bankruptcy Usually Will Not Stop Ongoing State Court Litigation To Establish Debtor Liability

There is some confusion about the automatic stay; some debtors don’t anticipate exceptions to the effect of bankruptcy upon their creditor actions. Bankruptcy stops collection of debts, but bankruptcy does not always stop creditor’s ongoing lawsuits to establish a judgment and their right to collect money from the debtor.

I read about a Florida case where a married couple filed bankruptcy primarily to stop the progression of a state court lawsuit filed against them by a disgruntled investor who lost money in an investment organized in part by the debtors. Their bankruptcy attorney told them that filing Chapter 7 would stop the lawsuit, which it did. The problem was that nine days after the bankruptcy was filed the plaintiff in the state court proceeding filed a motion to lift the stay in order that the state court case could proceed to conclusion. The debtors had to hire a second bankruptcy attorney to defend the motion to lift the stay because their first bankruptcy attorney did not handle contested bankruptcy matters.

Chapter 7 Debtor Can Lose Right To Amend Schedules

If the debtor and his attorney screw up the debtor’s exemption on his bankruptcy schedules the attorney usually can fix the problem by amending schedules. A bankruptcy court found that the right to amend can expire at some point in the bankruptcy case where the debtor and his attorney wait too long to amend.

 The particular case involved a Chapter 7 bankruptcy in which the debtor claimed the $4,000 wildcard exemption as to his personal property. The problem was that the debtor’s exemption schedule also listed his house as being exempt under the Constitutional homestead exemption. The debtor’s property schedules claimed the house was upside down. If your house has no equity you do not usually need to claim a homestead exemption; you can’t exempt 0 value. The problem was that debtor who list a homestead exemption cannot also claim a $4,000 wildcard exemption.

The trustee is this case pounced on the debtor’s error and filed a motion to compel the debtor to turn over personal property the debtor had claimed under the wildcard exemption because he had no right to a wildcard exemption having also claimed homestead exemption on his schedules. The debtor did not respond to the turnover motion, and the court entered the turnover order against the debtor.

The debtor finally figured out the problem. He submitted amended bankruptcy schedules omitting the homestead exemption of the upside down house and reasserting the wildcard exemption.

Book Deals And Movie Deals Are Not Part Of Bankruptcy Estate When Contract Is Signed

One of my new bankruptcy clients is a published author. His career stagnated. He piled up a large amount of unsecured debt to pay living expenses and keep his house. He just signed a substantial book deal to write a new book. His ship is not “in”, but he can see the sail on the horizon.

He has a signed contract with the publisher. When he completes his book the publisher will pay him big bucks. There is a small advance. The man wants to file Chapter 7 bankruptcy. He wants to know whether the trustee will take the proceeds of his book contract.

The book contract is what the bankruptcy law refers to as an executory contract. The debtor has to perform personal services in order to get paid. When he completes the book his right to the money will vest; no more services will be required. Contracts which are executory- there is work that the debtor still has to do- on the date of filing are not part of the debtor’s bankruptcy estate. The trustee cannot write the book on behalf of the debtor, and the trustee cannot force the debtor to write. No slave labor in bankruptcy.

This client can file bankruptcy, write the book, and keep the money. Book deals, movie deals, and public appearance contracts are not part of the bankruptcy estate until the debtor has performed what he agreed to do.