Florida Bankruptcy Law Blog

Bankruptcy Sometimes Involves Luck

Like most things in life bankruptcy involves some luck. Particularly, there is luck in the draw of your bankruptcy trustee. There is variation among Chapter 7 bankruptcy trustees in their policies concerning pursuit of non-exempt assets which can be taken from the debtor to pay unsecured creditors. Bankruptcy trustees are paid mostly by "commission"; they are paid a percentage of money recovered for creditors. They are not paid based on the time they spent trying to recover assets. The same is true for attorneys employed by bankruptcy trustees to handle legal proceedings- no recovery, no legal fee. Some trustees are more aggressive than others and will pursue relatively small assets while other trustees often ignore low-value non-exempt assets in order to spend more effort after potentially large recoveries.

Recently I attended a trustee meeting on behalf of several clients each of whom had significant non-exempt assets. In each case, I told the clients that they would have to surrender or buy back from the trustee their non-exempt assets. One Chapter 7 client listed on his schedules over $8,000 of liquid non-exempt property. A second debtor had about $4,500 non-exempt property including three non-exempt cars. A third debtor at the same session listed over $65,000 of non-exempt real estate equity and about $7,000 of non-exempt personal property. The trustee did not mention any of these clients’ non-exempt property- he did not asks the clients for copies of deeds, car titles, or other information about the property. He did not ask the debtors if they wanted to surrender or buy back their non-exempt property. The trustee can still pursue these assets, but it almost all cases a trustee pursuing non-exempt assets will raise the issue at the creditor meeting and will discuss the debtor’s alternatives at the meeting.

It seems that this Chapter 7 trustee is overlooking smaller amounts of non-exempt assets because she believes it is not practical to pursue the assets in today’s economy of depressed asset prices. These debtors were lucky. Two of them expressed relief that they finally got a break financially. All debtors should assume that they will have to surrender or buy back any and all non-exempt property in order to decide if bankruptcy is in their best interest. But maybe, you’ll get lucky.

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

Dismissals Of Chapter 7 Bankruptcy As Abusive When Debtor Passes Means Test

Many bankruptcy debtors do not understand eligibility for Chapter 7 bankruptcy. They rely  too much on the means test, and they assume that if they are exempt from or pass the means test they automatically are eligible for Chapter 7. The means test is one test of Chapter 7 qualification but it is not the only applicable standard. If a debtor passes the mathematical means test analysis he avoids a presumption of abuse; the law creates a presumption that debtors who cannot pass the means test should not be filing Chapter 7 bankruptcy. However, the means test is not the only test. Debtors who pass the means test, or are exempt from the means test, may still have their Chapter 7 filing dismissed or converted to Chapter 13 if the totality of circumstances of their financial and family situation shows that their Chapter 7 is an abuse of the bankruptcy system. A Chapter 7 filing is abusive if it was filed in bad faith or if the applicable circumstances show that the debtor has the ability to repay a significant portion of his unsecured debts.

Whereas all bankruptcy debtors with primarily consumer debts must subject their filing to the means test, the abuse test only applies when the United States Trustee, or other party to a case, files a motion to dismiss the case for abuse under Code Section 707(b). The abuse test is subjective. It is very difficult to predict with certainty whether a particular debtor above median income may be challenged successfully. Another point is that the means test formula looks only at your income and expenses prior to the filing date, but the abuse test may consider increases in income and actual or possible expense reductions following the bankruptcy filing. The point is that prospective Chapter 7 debtors who have relatively high incomes or live lifestyles which could be considered "extravagant" for someone in bankruptcy should be aware that their bankruptcy could be contested even if they pass the means test.

My experience with fellow bankruptcy attorneys leads me to believe that many attorneys either do not understand or give insufficient consideration to the issue of abuse under Section 707(b)(3). I think its important that relatively high income Chapter 7 filers understand this issue. I found one bankruptcy court decision that provides a clear and thorough explanation of the applicable tests and presumptions under the means test and the abuse test relevant to Chapter 7. In re Henebury, 361 B.R. 595. I better understood the law after reading this decision.

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

Negotiating Mortgage Modification Can Create Substantial Abuse Issues in Chapter 7 Bankruptcy

Dealing with your mortgage company and filing Chapter 7 bankruptcy are supposed to be independent of one another. Filing Chapter 7 bankruptcy should not effect your relationship with the mortgage lender of an exempt homestead property; but, it can in some cases. Debtors above applicable median income must past a means test to file Chapter 7. The general rule is that your monthly mortgage payments are a deduction from income for means test purposes and help you qualify for Chapter 7. The means test formula implicitly assumes that people should pay their home mortgage first and if after paying the mortgage, and other secured debts, they do not have enough money left to pay unsecured creditors they are more likely to pass the means test. However, if people have not paid their mortgage for several months they could have a problem filing Chapter 7 bankruptcy. Although they remain liable for the debt and can use the debt for means test purposes, the United States Trustees office often challenges these Chapter 7 filings on the basis of "substantial abuse." The U.S. Trustee argues that having not paid their mortgage payments these Chapter 7 debtors have remaining enough cash flow to repay a significant portion of unsecured debt in Chapter 13, and therefore, their Chapter 7 filing should be denied and converted to a bankruptcy under Chapter 13. Of course, substantial abuse is determined on a case by case basis. Many debtors who cannot afford mortgage payments cannot afford to repay credit cards as well, whereas some people may be hoarding cash if they decide to stop paying their mortgage to relinquish an upside down house to their mortgage lenders.

The issue becomes more complicated because of mortgage lenders’ prevailing policy of not negotiating mortgage modification with homeowners with up to date mortgages. The majority of lenders will start modification discussion only after the homeowner is at least three months behind, and greater delinquency increases the homeowners negotiating leverage. Many people in financial difficulty may want to discharge unsecured debts and negotiate a mortgage modification. When they purposefully stop paying mortgage payments to qualify for modification they may be creating a substantial abuse issue with the U.S. Trustee if they try to file Chapter 7 against unsecured debts. It’s a classic rock and hard place dilemma for may people in today’s economic environment resulting from the conflict of mortgage lender’s policies and U.S. Trustee policies. I am not aware of any court decision which considered this situation , but I current have a few clients trying to file Chapter 7 bankruptcy with this fact situation and legal issue.

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

Credit Crunch Affecting Chapter 7 Trustee Property Sales: More Leverage To Debtors

Credit problems are affecting Chapter 7 Trustees as well as Chapter 7 debtors. At a recent creditor meeting a Trustee explained to me that tightening of credit in the general economy is adversely affecting the trustees ability to liquidate non-exempt assets for creditors. Trustees gather debtors’ non-exempt assets and sell the assets either to the debtors or to the general public at auctions. Cars are sold at car auctions and other personal property is liquidated at property sales. The trustee told me that in a normal economy buyers at trustee’s auctions often pay for bankruptcy property with credit cards or bank lines of credit. In today’s economy fewer potential buyers have been attending bankruptcy auctions and bids are lower, largely because of the recession and credit crises.

As a result, the Chapter 7 trustees are realizing that non-exempt property will bring less money at auction than in a normal economy. This situation give debtors relatively greater leverage to negotiate the value and the repurchase from the trustee of their non-exempt property. With sales at public auctions less lucrative to trustees because of general credit problems, the debtor is the person most motivated to find money to retain his non-exempt assets. Trustees may be recognizing that the debtor’s offer to repurchase his non-exempt property will be the best offer available to today’s economy.

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

Good News For Used Car Dealers May Not Be Good For Chapter 7 Debtors

I buy all my cars from a guy named "Mo" in Longwood, Florida, at his business called Auto Gallery. I’ve purchased several used cars from Mo during the past 15 years. Last week I asked Mo how his used car business was doing, expecting to hear the type of complaint currently expressed by most businessmen that business is way down and that  they are struggling to survive. Instead, Mo told me, with a big smile, that his used car business is booming! He said it has never been easier to sell his cars and that large dealers are willing to pay extremely high prices for his cars; Mo can’t keep cars on the lot. I thought Mo might be doing something illegal if he was making so much money in today’s economy, but his joy about his used car sales was later confirmed by a USA Today article that said used car prices are soaring because people are buying used cars instead of new cars. This is good news for Mo, but its not good news for people who file Chapter 7 bankruptcy.

Florida bankruptcy debtors are limited to $1,000 car equity in Chapter 7. People who don’t own a homestead get additional exemptions. Last fall, as the credit dried up and the economy declined, car values declined. Chapter 7 trustees at that time were relatively less interested in pursuing debtor’s cars because the used cars were depreciating assets. Now, with the strong recovery of the used car market, more and more debtors will find that their used cars exceed the applicable car exemptions. Chapter 7 trustees are likely to be more aggressive challenging debtors’ low car valuations, and the trustees will be more aggressive pursuing debtors’ used cars. I usually suggest debtors appraise their car at large dealers such as Carmax or AutoNation as these offers are a reasonable estimate of what a bankruptcy trustee could realize from a car auction.

Bankruptcy Does Not Exempt Cars Because You Need Car To Get To Work

Bankruptcy law is supposed to give the honest debtor a fresh start in life. A good job is the basis of a fresh start for most bankruptcy debtors, and most good jobs in Florida require that the employee commute by car to work as most Florida jobs are not located in a concentrated population centers served effectively by public transportation. So, common sense leads many potential bankruptcy debtors to expect that Florida bankruptcy law would protect a debtor’s vehicle required to get the debtor to his job after his bankruptcy discharge to assist the debtor’s fresh start. No so. Florida law permits debtors to exempt only $1,000 of equity in a vehicle, although debtors who do not live in an exempt homestead may get additional exemption. The dollar exemptions applied to vehicles are not waived because the debtor needs his car to get to work. There are no car exemptions based on necessity. That most debtors have difficulty financing replacement vehicles after filing bankruptcy does not increase the limited car exemptions. If your car is owned free and clear, and the car is worth more than the applicable exemption, you may lose your car in a Chapter 7 bankruptcy regardless of how much you rely on your car to earn a living.

Necessity also does not help debtors reaffirm car loans in bankruptcy. Debtors with no car equity, or equity within the $1,000 exemption, need to reaffirm car loans with the car lender in order to maintain their vehicle. When the debtor’s schedules indicate the debtor cannot afford the loan many bankruptcy courts will not permit the debtor to reaffirm the loan. The law does not give bankruptcy judges the discretion to waive the debtor’s inability to afford a car loan just because the debtor needs the car for work.

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

Consequences Of Debtor Not Signing Reaffirmation Agreements For Car Loans and Leases

Chapter 7 bankruptcy debtors are required to reaffirm car loans in order to keep their car and their car loan through a bankruptcy. The bankruptcy code says that if a debtor does not reaffirm a car loan (or other secured personal property loan) the automatic stay is lifted as to that loan and the creditor can repo the car. In practice, there are varying consequences for a debtor’s inability or unwillingness to sign a car reaffirmation agreement. According to one prominent creditor attorney, if a debtor refuses a reaffirmation Ford Credit will repossess the vehicle even if the loan is current. GMAC will not repossess the car but will reserve its right to do so in the future at its discretion. If a debtor submits a reaffirmation agreement, but the bankruptcy denies the reaffirmation because the judge believes its not in the debtor’s interest, most lenders will not repossess the vehicle if the loan is current.

The reaffirmation of car leases is unclear. The bankruptcy code does not require reaffirmation of car leases, and the Orlando judges typically will not approve a lease reaffirmation agreement. The debtor can assume or reject leases, but the debtor does not "reaffirm" a lease, technically speaking. The major car lenders will insist that bankruptcy debtors sign reaffirmation agreements for car leases, but in this case, if the debtor refuses to reaffirm a lease the lenders usually will not repossess the vehicle if the lease is reasonably close to the end.

　

　

　

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

Car Title Determine's Chapter 7 Trustee Interest In Car Paid For Wholly By Debtor's Parents

Many parents put their children on title to the parents’ real estate, bank accounts, and cars for estate planning purposes. The parents want to give the children access to the assets in the event of the parents’ disability or death. Recent blog posts(see below)  have addressed problems this joint titling causes when the children file bankruptcy. The parents’ assets are subject to inclusion in the child’s non-exempt bankruptcy estate. In the case of jointly owned assets such as real estate or financial accounts the debtor children could take the position, if provable by evidence, that all the money that when in to the jointly owned real estate or financial accounts was the parents’ money so that the debtor child had no "equitable interest" in the property. If the child’s interest is limited to having their name on the account or deed with no financial investment, and the child can asset no rights or control in the asset, they may be able to protect the asset from a bankruptcy trustee.

This issue came up during a creditors meeting this past week for one of my Chapter 7 bankruptcy clients. In this case, a parent had purchased a car for cash and added the debtor/child’s name to the car title. The parents’ furnished all the money to purchase the car, and the parents’ paid for insurance. The Trustee rejected the debtor’s argument that this car was his parents’ car to be excluded from his bankruptcy estate. The Trustee said that car title is determined solely by the names on the title certificate and that there is no such thing as equitable ownership in a car. Therefore, the debtor could not sustain a position that he had less than 50% interest in the car as shown on the face of the car title.

I have not researched the issue, but I think the trustee’s position is legally correct. If the Trustee is correct the child’s 50% interest in the car will be part of the bankruptcy estate. The parents will have lost half of their equity in their car, and the parents or child will have to pay the Trustee half of the current car value or surrender the vehicle to be sold at auction by the Trustee. (in which case the parents would receive half of the sale proceeds). This example points to the pitfalls of estate planning by sharing ownership with children.

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

Chapter 7 Trustee's Discretion To Pursue or Ignore Non-exempt Assets

Chapter 7 trustees have discretion to pursue, or not pursue, a debtor’s non-exempt assets for the benefit of the bankruptcy estate. Just because a debtor files bankruptcy with assets over the personal property exemption limits does not mean he will necessarily lose the assets during the Chapter 7 bankruptcy. For example, this past week I attended a trustee examination at a 341 meeting with a debtor whose bankruptcy schedules showed that he had $2,700 of non-exempt car equity and an expected non-exempt tax refund of approximately $1,800. The Chapter 7 trustee indicated that he had no interest in pursuing the assets or asking the debtor to buy back the assets. The trustee gave the debtor a "free pass" as to his non-exempt assets.

In my experience this particular trustee is neither unusually lenient nor strict, and I saw no indication that the trustee wanted to do this debtor any favors for any reason. The trustee probably decided that the amount of non-exempt assets was too small to justify the effort to recover the assets. Motions, paperwork, and court orders are require in most cases where a Chapter 7 trustee wants to recover and sell a debtor’s assets for the benefit of a creditors. Trustees are compensated based on the amount of assets recovered for the bankruptcy estate. Sometimes trustees decided that the amount of a debtor’s non-exempt assets is not large enough to justify the effort to recover and sell the assets. Different trustees have different policies toward asset recovery in small Chapter 7 bankruptcy estates. You should not assume that you will be able to keep non-exempt assets even if the amount of non-exempt assets is relatively small. Some debtors are lucky, but I have also seen trustees pursue very small non-exempt values in assets, such as cars, in order to force payments by the debtors.

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

How Can Chapter 7 Debtors Learn To Properly Value Their Furniture On Their Bankruptcy Schedules

Florida bankruptcy law permits each debtor to exempt $1,000 of furniture and other personal property including cash. This exemption is small compared to personal property exemptions permitted bankruptcy debtors in other states. Fortunately, your personal property is valued for bankruptcy purposes at garage sale or flea market value. Bankruptcy trustees in the Orlando area are accustomed to seeing very low property valuations, and most will not go after personal property that is valued slightly above the $1,000 per-person exemption limit. Most of my clients understand how to value their belongings at garage sale value. Most do not overvalue their property, and few of my clients have been subject to trustee objections over the exemption of their personal property. Occasionally, I find clients who persistently over-value their property and end up paying money to their Chapter 7 bankruptcy trustee. Once a clients files his property schedules with the bankruptcy court it is difficult for him to amend schedules with lower valuations after a bankruptcy trustee insists on payment or surrender of property.

I cannot tell my bankruptcy clients the valuations of their own property. I do not inspect my clients’ homes or their property, and even if I did, I am not an expert in property valuation. My staff sometimes suggests to clients that their valuations are outside the range of what other clients have submitted in the past, but beyond that advice, we do not suggest what something is worth. I do not want my clients telling their bankruptcy trustees that I, or someone in my office, told them what values to place on their property.

One way to help prospective debtors value property is to suggest they look at property schedules submitted by other people who filed bankruptcy before them. I will not show bankruptcy property lists or values of any of my clients to subsequent clients because of attorney-client privilege. However, all bankruptcy petitions are public record and schedules can be examined using the federal courts’ Pacer computer system. Many of my clients tell me they have used Pacer. Prospective bankruptcy debtors can look at property schedules of any bankruptcy petition previously filed in the Orlando Division, or anywhere in Florida, to see examples of other bankruptcy debtors’ personal property lists and valuations. A debtor should not copy another person’s lists nor their values, but looking a the property schedules of several other debtors can help guide bankruptcy debtors in the valuation of their personal property for bankruptcy purposes and avoid unnecessary payments to trustees because of over-valuation.

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