Florida Bankruptcy Law Blog

What Happens When Debtor Buys A Car For His Child

Many young adults need their parents’ help to purchase their first car. Sometimes the parent puts the car in their own name in order to get lower insurance premiums or better loan rates. Typically, the child drives the car, makes the car payments, and pays for gas and repairs. When the parents decide to file bankruptcy they describe the car as their child’s car. Most bankruptcy trustees will argue that the car is the parents property and that any equity in the car becomes part of the bankruptcy estate. Parents will have to pay the bankruptcy trustee the amount of non-exempt equity in the car they intended to purchase for their child. Parents wanted to purchase a car for a child over 18 years of age should put the car in the child’s name.

Debtors who own "their child’s car" in this type of situation have a possible defense against a bankruptcy trustee’s efforts to bring the car equity into the bankruptcy estate. The parents could assert an argument that they hold legal title in trust for, or as a nominee for the child. The child has all equitable interest in the car. This argument could be effective where the child has paid his own money for all car expenses and where the child controls the use of the car.

posted by Jonathan Alper, bankruptcy and estate planning attorney, Orlando, Florida

Are Partnership Distributions Means Test Income?

The means test considers all regular family income. In some cases, it is unclear whether money the debtor receives to pay living expenses is income for means test purposes. Consider a person who invests $200,000 in to a business partnership. The partnership initially generates positive cash flow which is distributed to the partners. After some time, the business slows down and does not produce cash flow from operations. The investor needs money to pay living expenses. Each month the partnership agrees to pay the investor approximately $5,000 as a return of his initial capital contributions. At this rate, the investor will receive $60,000 per year from the partnership. The investor asked me whether the return of capital is considered as income for his means test analysis if he has to file Chapter 7 bankruptcy.

Means tests are reviewed and administered by the U.S. Trustee office. I called an attorney for our local U.S. Trustee and posed the question. The attorney could not provide a definitive answer. The attorney said that if the partnerships distributions to the investor were in the nature of loans then the money would not be considered means test income. If the money was profit distributions then it would be income. If the money was return of capital the treatment is unclear. The best plan would be for the partnership records to show that the $5,000 monthly payments were loans. There should be a partnership resolution documenting the amount and the nature of the distributions. It would probably help this prospective debtor if distributions required the consent of other partners, and if under the partnership agreements, the distributions could be suspended by partnership vote.

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

Means Test Exemption For Business Debts: Which Debts Count?

The "means test" for Chapter 7 does not apply to people whose debts are primarily consumer debts. In some cases, the analysis of a debtor’s debts focuses only on unsecured debts which are the class of debt that gets discharged in Chapter 7. Specifically, where one spouse files Chapter 7 bankruptcy and the spouse owns property jointly with the non-filing spouse, the debtor’s interest in marital property is exempt only and to the extent that the debtor and non-filing spouse do not have any joint unsecured debts. Joint secured debts do not affect the exemption of joint marital property. I am involved in a case which presented the question of whether the issue of business or consumer debt for means test exemption considered unsecured business debts or both secured and unsecured business debt.

I spoke by phone with an attorney from the U.S. Trustee’s office in Orlando. The attorney confirmed that for purposes of the means test qualification the U.S. Trustee considers both unsecured and secured business debt. If most of the debtor’s debt, secured and unsecured, is not consumer debt then the debtor does not have to pass the means test to file Chapter 7. This issue is important today when so many debtors are filing bankruptcy because of failed real estate investments. Debtors who are liable for large mortgages on investment property will often be exempt from the means test even though they have high incomes. Many people who qualified for large investment mortgages did so because they had high incomes. The U.S. Trustee attorney told me their office is seeing a relatively large number of Chapter 7 bankruptcies being filed by high-income debtors who escape the means test because of their mortgages on one or more parcels of investment real estate.

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

Does A Non-Filing Spouse Retain Privacy Of Personal Financial Information?

An experienced bankruptcy attorney called me to discuss the following issue in a Chapter 7 bankruptcy filed by a married man. The debtor's wife did not join in the petition. The spouses were recently married. The debtor husband acquired his assets and incurred his debts prior to his marriage. The spouses filed separate income tax returns. The debtor listed his current income and his estimate of his wife's income on his bankruptcy schedules. The debtor's family income was above Florida median income so the debtor had to qualify under the means test for Chapter 7 bankruptcy. The U.S. Trustee challenged the debtor's qualification under the means test, and the Trustee demanded that the non-filing spouse document her income and produce her tax returns. . The wife refused on grounds of confidentiality and privacy. She asserted that the U. S. Trustee had no right to look at her personal financial information because she was not involved in her husband's bankruptcy. The U.S. Trustee threatened to challenge the bankruptcy unless the non-filing wife complied with the request for financial information.

I am not aware of any court decision dealing with the privacy rights of a non-filing spouse where the spouse's income is an issue in the means test of the debtor spouse. Although all family income is relevant to the means test it seems that a non-filing spouse does not forfeit rights of privacy because her spouse chooses to file bankruptcy. I would be interested if any reader knows of a court decisions dealing with this issue.

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

Homestead Sales Proceeds In Chapter 7 Bankruptcy

The term "homestead account" is not an official legal term under Florida law. The term is used to describe a financial account that contains money from the sale of a homestead property. Money from sale of a primary residence remains exempt under Florida’s homestead law when it is deposited in a bank account so long as the debtor and former owner intends to reinvest the money in another homestead property within a reasonable time. Once a new homestead is purchased any money remaining in the "homestead account" loses its homestead exemption. A caller described his situation where he sold his homestead, deposited money in a bank account intending to find a new homestead, but before he could find and purchase a new home he filed bankruptcy. After he filed, just before the case was closed, he used most, but not all of the homestead proceeds to buy a new home . He wanted to know if the remaining sale proceeds would be taken by the bankruptcy trustee.

The exemption of money in the homestead account is determined as of the date the bankruptcy was filed. If on filing date this debtor actually intended to reinvest all the money in a new homestead the money was probably exempt in bankruptcy. Moreover, the trustee has a limited time to object to the exemption of this money, or any other asset. By the time the bankruptcy proceeding is almost closed, as in this case, that exemption time has run. If after filing the debtor decided to buy a lesser house and sales proceeds were left over the remaining money should not be divested of its bankruptcy exemption. Of course, any new creditor arising after bankruptcy filing could attack the remaining homestead account money.

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

Filing Bankruptcy In Florida After Short Move To Another State Looking For Work

A professional licensed in Florida emailed me this interesting fact situation. The man’s professional business in Florida failed. His business failure in Florida had caused him to run up substantial credit card bills in his name alone. He and his wife rented out his Florida home on a month to month lease, and they both moved out of state looking for better opportunities. His wife got a high paying job out of state. They rented an apartment in their new location where they have lived for two months.. He asks whether a Chapter 7 bankruptcy would be possible, and if so, could he file bankruptcy in Florida after returning to his former homestead. He is also concerned about his bankruptcy jeopardizing his wife’s money and jewelry.

There are some interesting issues in this real life fact situation. I do not think the debtor relinquished Florida residency by moving to a new location for two months. They probably did not abandon their Florida homestead by leasing it to someone else on a month to month arrangement. However, the real issue is whether they intended never to return to Florida when they went looking for a better life elsewhere. If they could prove they always intended to return to their former home they probably could protect the home under Florida’s homestead exemption.

The wife’s high paying job might cause them to fail the means test, except that the husband stated that his debts were primarily business related which fact would exempt his bankruptcy from means testing. The money his wife accumulated from her own work would be exempt from the husband’s bankruptcy. If he and his wife retained Florida residency any jointly owned accounts and property would be exempt in the husband’s case assuming there are no joint unsecured debts.

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

Chapter 7 Risk For Wholly Owned Professional Corporation

A successful, licensed professional who operates his practice through a wholly-owned corporation decides to file Chapter 7 bankruptcy pro-se (on his own and without an attorney). The debtor fills out his own bankruptcy schedules and values his professional business as worth $0. He tells the bankruptcy trustee that the stock in the business is worthless even though he generates substantial professional fees through the business because the business depends totally on his own work. He argues that if  anyone else owned his stock he would stop working in which case the value would be $0. The bankruptcy trustee in this case didn’t accept the debtor’s position; the trustee demanded turnover of all the debtor’s stock in his own company and accused the debtor of trying to hide the value of the business’ current receivables and cash in bank.

This example- a condensed version of a case I’m involved in- illustrates the risk involved when an owner of a successful service business files a Chapter 7 bankruptcy. The Chapter 7 trustee may not accept a zero business value for a service business. If the trustee sees value in the business the trustee, by taking the stock, can effectively shut down the business ; the debtor is not going to work for the bankruptcy trustee. Goodwill and reputation are put in jeopardy by subjecting a service business to Chapter 7 bankruptcy. A debtor operating a successful service business will usually find a better result through Chapter 13 bankruptcy. In Chapter 13 the debtor stays in possession and control of his business; creditors are held at bay while the debtor’s business can generate income to pay his creditors.

This example also is useful to show the risk of do-it-yourself bankruptcy filings under the new bankruptcy law. Under the old bankruptcy law successful pro-se Chapter 7 bankruptcy was difficult, but possible. The new law has made it extremely risky for anyone other than a bankruptcy attorney to navigate through the choices and pitfalls of bankruptcy. A Chapter 7 bankruptcy is equivalent to a major financial surgery where all your assets are exposed, examined, and made subject to forfeiture. Doing your own bankruptcy to save some legal fees is usually the most expensive option.

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

Interesting Fact Situation For Recent Florida Residents

I new client with a complex fact situation illustrates in one case some interesting issues for Florida bankruptcy under the new bankruptcy law. The situation is described to help educate debtors with similar histories. Here is a summary (not a precise account) of some of the important facts. A husband a wife moved to Florida from New York six months ago and bought a house. They put down $75,000 on the house which has since appreciated. They own an investment rental property jointly in North Carolina with equity. Each is employed with high paying jobs in Florida. The husband has over $200,000 of unsecured debts including about $20,000 joint debts with his wife. This couple has other non-exempt property including two fully paid automobiles. They asked what would happen if they filed Chapter 7 bankruptcy.

The first issue is what law applies to this bankruptcy. Because they are currently Florida residents they should file bankruptcy in Florida. But, since they have been in Florida less than two years their Florida bankruptcy will proceed under New York’s exemptions. I think New York has a $50,000 homestead exemption. If the couple files jointly they can double the $50,000 exemption, claiming a total $100,000 exemption, under recent court decisions allowing each joint creditor to take a full homestead exemption. The $75,000 down payment used to acquire the homestead will be exempt in a joint filing. If the husband files alone, he should be able to still exempt his share (½ of $75,000) of the homestead under New York’s $50,000 exemption..

The treatment of the North Carolina property depends on its status as tenants by entireties property and whether one or both spouses file bankruptcy. New York does not recognize an exemption for tenants by entireties property. In jurisdictions that recognize a tenants by entireties ownership, the T by E property is exempt if one spouse files, except that the amount of any joint debt with the debtor’s spouse can be assessed against the couple’s T by E assets.

If the husband alone files the T by E status of the N.C. property is an issue; if both spouses file, there is no T by E exemption. North Carolina and Florida do recognize T by E exemptions. Florida’s T by E exemption does not apply because this case is under New York law. However, the general rule is that exemptions as to real property are the exemptions in the state where the property is situated. Even though this case is under New York’s exemptions generally, I think that North Carolina’s T by E exemption would apply to the husband’s individual bankruptcy.

One option discussed was sequential filings. The husband might file individually so that the T by E exemption would apply to the N.C. rental property. After the husband gets his discharge the wife could file. Secondly, the wife proposed selling her expensive car to pay off their joint debts prior to the husband’s filing in order to eliminate joint unsecured debt that could cause a problem for the N.C. property in the husband’s case. The wife would have wait long enough to eliminate issues of preference in her case following payoff of the unsecured debts. I don’t have first hand experience about trustees view of sequential filings by spouses to take advantage of entireties exemptions.

These people are considering all these issues before deciding whether to file bankruptcy. The new bankruptcy law has made filing bankruptcy more complex. You don’t know what kind of legal issues apply in your situation until you consult a bankruptcy attorney. In most cases, bankruptcy is not a do-it-yourself project.

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

Importance of Completing Financial Management Course

The Court's enforcement of the education requirements of the new bankruptcy law are starting to have an adverse effect on many unwary and procrastinating debtors. Most debtors are diligent in completing the pre-filing education course. Many of these same debtors, however, are forgetting that they need a financial management course certificate after they file bankruptcy in order to have their debts discharged. Debtors who do not take the financial management course, or who take the course and don’t return their certificates for filing, face their case being closed without a discharge. In such event, the debtor must reopen the case and pay a filing fee for the purpose of filing the certificate of completion of the financial management course in order to clear his unsecured debts.

Typically, debtors forget to take the financial management course because they don’t read, or they don’t take seriously, instructions they receive from their own attorney. For example, my office reminds our clients in writing two or three times during the bankruptcy process of the importance of completing a financial management course. Nevertheless, too many people are neglecting to take the financial management education course, or they don't return the certificates for filing. As a result, they are facing additional costs and fees in their bankruptcy.

A successful bankruptcy is a partnership between the client/debtor and the attorneys office. The attorneys role is to provide legal services and advice to help the client, but ultimately, the client is responsible for his own bankruptcy. In my opinion, those debtors who accept their responsibilities in the bankruptcy process  have the best chance of taking responsibility for their financial success after bankruptcy.

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

Is Means Test Required For Primarily Business Debt Bankruptcies?

A frequent cause of Chapter 7 bankruptcy is using credit cards to finance the start a small business that ultimately fails. The business owner is left with reduced income from the unsuccessful business and a mountain of credit card debt used to support the business. The means test applicable to Chapter 7 bankruptcy applies to debtors whose debts are primarily consumer debts. Debtors facing insolvency because of business debts do not have to pass the means test in order to qualify for Chapter 7. A separate question is whether these debtors have to go through a means test analysis and file the means test results. Is a Chapter 7 bankruptcy subject to dismissal for failure to file a means test even though debts are primarily business debts and the means test results are inapplicable to the debtor’s eligibility for bankruptcy.

This issues was addressed to me by a bankruptcy judge. My client’s debts were almost exclusively business debts, and we did not file a means test analysis. The court initially dismissed the case for failure to comply with filing requirements.. In this case, the court allowed my client to reinstate his bankruptcy subject to filing a means test analysis. The judge did not issue a ruling on the issued posed above but said that it was an interesting issue and pointed out that two bankruptcy courts in Texas have ruled that filing a means test analysis is required in all Chapter 7 bankruptcies whether or not debts are primarily consumer debts.

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

Post Filing Inheritance Situation

If a Chapter 7 debtor receives an inheritance, or is entitled to an inheritance, from an estate or living trust within six months after filing bankruptcy then the inheritance is part of the bankruptcy estate. The trustee can claim the inheritance and distribute the money to pay the debtors’ unsecured creditors. At a meeting of creditors, one of my clients told the trustee that a relative was ill and that he/she was a beneficiary of the relative’s living trust. The trustee explained that if the relative died in the near future, within the six month period, the debtor was to notify the trustee of any inheritance. The debtor proceeded to tell the ill relative that the inheritance was in jeopardy. The ill relative, still mentally competent, asked his attorney to amend the living trust to make the debtor’s spouse a substitute beneficiary. The relative died within six months of the bankruptcy. The question asked was whether the debtor still had to notify the trustee of the death.

This interesting question involves both bankruptcy and estate planning law. The transaction at first appears to be an improper device to defeat the rights of a bankruptcy trustee and the debtor’s creditors. Yet, who did something wrong and who may be liable. The debtor was not precluded from explaining the situation to a relative. Under estate planning law, any competent person may change their will or trust at any time. The bankruptcy trustee took no steps to perfect any rights in the inheritance. The relative is not part of the bankruptcy case. The estate planning attorney has a duty to his client to make changes in the will or trust, especially assuming he did not know about the debtor’s bankruptcy. Nevertheless, it does not seem right.

I’m not sure of the answer here, but I think the debtor has a legitimate position that he/she is not obligated to inform the trustee of what is now her spouse’s inheritance. The problem for the debtor is that the spouse has full control over the funds. It may be different if there is an agreement between the spouse’s that the inheriting spouse is acting as an agent or nominee for the debtor in which case there may be a possible claim of fraud unless the inheritance is disclosed.

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

Who Is Entitled to Post-Filing Value Appreciation?

What happens if an asset owned by the bankruptcy debtor appreciates in value after the bankruptcy is filed? I received an email from a debtor in Arizona who complained that his Chapter 7 Trustee would not credit him with post-filing appreciation in a non-exempt asset which was part of the bankruptcy estate. He believes that all the Chapter 7 trustee is entitled to is the value of estate assets on filing date. I think the debtor is incorrect, although I have never heard anyone raise this issue.

I think this debtor is confusing two concepts about what constitutes a Chapter 7 bankruptcy estate. The bankruptcy estate consist of all assets, including rights, powers, and equitable interests, which the debtor has on the date of filing. If the debtor acquires new assets after filing bankruptcy those new assets belong to the debtor and not to the Chapter 7 trustee. However, if an asset of the estate appreciates in value during the administration of the bankruptcy estate I do not believe the Trustee or the creditors are limited to the value on filing date or that they owe back to the debtor any amounts of post-filing passive appreciation.

On the other hand, if the issue is whether the value of a bankruptcy asset is above or below a dollar exemption limit, I understand that value on date of filing is the controlling value. For instance, if a debtor owns a homestead which is worth $125,000 at the time of filing, and if the applicable homestead exemption is $125,000, the homestead is exempt even if it appreciates in value after the filing date. The above represents my understanding; please tell me if its incorrect.

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

Can Chapter 7 Wipe Out IRS Lien on Homestead?

I received an e-mail from someone who had filed Chapter 7 bankruptcy after the IRS had placed a tax lien on his homestead. The person stated that the taxes due were discharged in the bankruptcy. The general rule is that income taxes due three years prior to filing Chapter 7 are dischargeable. After the bankruptcy was over the writer tried to sell his house and found that the IRS lien still encumbered the house and had to be paid from sale proceeds. He wants to know why his house was subject to an IRS lien if his income taxes were wiped out in the bankruptcy.

This situation is not uncommon. The IRS lien does still attach. When the IRS issues a tax lien that lien changes the income tax obligation to a secured debt. When he filed bankruptcy the IRS had already obtained a security interest in his homestead. Homestead property is not protected from IRS liens. Even if the income taxes were otherwise dischargeable, the IRS tax lien, just like other pre-petitions mortgages and security interest, cannot be wiped out in a bankruptcy. If the IRS gets a tax lien on your property before you file bankruptcy, the bankruptcy will not wipe out the tax lien.

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

Responsibility For Maintenance of Non-Exempt Estate Property During Case Administration

A chapter 7 debtor has substantial non-exempt assets including two commercial rental properties in another state. The debtor and trustee entered into a money settlement under which the trustee would deed back to the debtor, or his designees, the commercial rental properties. Two months after approving the settlement in open court the bankruptcy court has not written and issued an order, so the parties have not implemented the transaction. In the meantime the trustee has collected rents from commercial tenants but the trustee has not paid mortgage payments, real estate taxes, or maintenance. The properties conditions has deteriorated and equity has evaporated. Taxes are past due. The City is citing building code violations. The City is levying fines against the property. The debtor is very concerned that after the order approving settlement is issued and the trustee conveys title back to the debtor he will be stepping into liability for taxes and fines incurred post filing. The debtor asks what he can do to protect himself against incurring personal obligations to the City.

I posed the question to some local attorneys, none of which is sure of the answer. Technically, I think the Debtor can refuse acceptance of the Trustee’s deed and effectively disclaim ownership. One attorney suggested that the City make a claim for administrative expenses incurred, yet that is beyond the debtor’s control. Someone suggested the debtor make an administrative claim on behalf of the City for taxes and repairs; such claims are more often part of Chapter 11 proceedings. The debtor does not want to get into a fight with the trustee given the pending settlement. The trustee may make an emergency motion to prompt the order because the trustee is concerned about its liability during its control of what have become radioactive estate assets.

I don’t know the answer to this interesting situation. I would appreciate thoughts from anyone who faced similar circumstances.

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

Chapter 7: Median Income Definition Within Extended Family

One of the more interesting issues involved in the means test is defining the size of the debtor’s household. Household size together with total household income determines whether the debtor is above the state’s median income and therefore subject to means testing. A new bankruptcy client presented the situation where she and her daughter live in a home owned jointly with her mother. The client’s income is under the median income for a two person family. The mother pays part of the mortgage, but otherwise, the mother keeps her money separate to pay only the mother’s personal bills. The daughter is primarily responsible for the household bills and expenses and totally responsible for her child. However, if you add the mother’s income to the daughter’s income the total household income is well above median income for a household of three people.

I have not yet received the detailed income and expense records to calculate a means test analysis. It appears that by the law’s definition the household consist of three people. I am not aware of any means test provisions that would allocate less income to the household because of the unwritten agreement among the income earners concerning their respective responsibility for expenses and dependants within the household. The means test allows debtor’s to show "special circumstances" to adjust means test results. In this case, I don’t’ know if the mother’s refusal to contribute her fair share of income to the expenses of others would be a special circumstance that would avoid the results of means test analysis.

This case illustrates that means test definitions are unclear, complicated, and could impose unfair results on families truly unable to meet legitimate expenses.

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

Secured Creditor Files Unsecured Claim

A creditor believes it has a secured claim. The creditor files a proof of claim form which is blank. The proof of claim does not assert a secured claim, an unsecured claim, or an amount of the debt owed. A bankruptcy judge asked myself and another attorney last week if the filing of a blank proof of claim in any way affects the creditor’s right to be a secured creditor. The judge had no experience with a blank proof of claim.

I do not think the blank proof of claim would diminish or waive an otherwise effective security interest. The general rule is that secured creditors so not have to file claims in bankruptcy, and that valid, perfected security interest flow through the debtor’s bankruptcy. I found a recent case in Hawaii with similar facts where a creditor filed an unsecured claim and found after the discharge order that its claim really was a secured claim. That court held that the filing of an inaccurate proof of claim does not by itself waive an otherwise valid security interest and that the creditor is not precluded from asserting its security interest unless the debtor has reasonably relied on the unsecured claim to his detriment.

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

Voluntary Dismissal of Your Own Chapter 7 Bankruptcy

Over the past year I have seen a few clients who had filed a Chapter 7 bankruptcy by themselves, without an attorney, and who decided they wanted to dismiss their own bankruptcy. A Chapter 7 debtor has no right to dismiss their bankruptcy. Once you file for Chapter 7 liquidation the Trustee, on behalf of you creditors, has an interest in your assets, and the Trustee or creditors can object to your dismissal. One of our Orlando judges recently issued a decision that discusses the legal standard for voluntary dismissal of a Chapter 7 bankruptcy

In case of In re McDaniel involved a motion to dismiss a Chapter 7 bankruptcy that had been filed primarily to discharge past-due income taxes. Unfortunately, the Debtor miscalculated the rules for tax discharges and found herself facing tax liability after the Chapter 7 would have been completed.

The judge said that Chapter 7 bankruptcy can be dismissed only for cause. The party seeking dismissal has the burden of establishing cause. The judge pointed out that courts have substantial discretion in ruling on a motion to dismiss a Chapter 7. The courts must consider the interest of the various parties involved, including the creditors. In the end, motions to voluntarily dismiss a Chapter 7 bankruptcy are evaluated under equitable principals including what the court see as the best interests of the debtor and prejudice to the creditors resulting from the dismissal.

In this case, the court found no bad faith on the part of the Debtor in filing for bankruptcy protection and no significant prejudice to the IRS. The judge granted the motion to dismiss.

Bankruptcy Under Other State's Exemptions

I overheard one of our local Chapter 7 trustees told me that many people filing Chapter 7 pro se (without an attorney) and even some experienced bankruptcy attorneys are making big mistakes in advising recent Florida residents about their homestead exemptions. Any resident of Florida can file bankruptcy in Florida. Any resident of Florida is guaranteed unlimited protection of his homestead from creditors. But, when a Florida resident files bankruptcy in Florida the unlimited homestead protection applies in bankruptcy court only if the bankruptcy debtor has lived in his homestead (including a immediately preceding Florida homestead) for 40 months or more. If not, the homestead protection in bankruptcy court is limited to $125,000 under the new bankruptcy law.

This trustee has seen several cases where people moved to Florida from other states and purchased an expensive homestead thinking their house was sheltered from their debts incurred in their prior state of residence. When these people filed bankruptcy less than two years after moving to Florida they were surprised by this trustee, and other trustees, that their exemptions are based on their prior residence. Therefore, these Florida debtors did not benefit from Florida’s unlimited homestead protection.

I have found that except for homestead protection people recently moving from other states get more exemptions in bankruptcy court than they would get as a Florida resident. For instance, Florida’s $1,000 personal property exemption and its $1,000 car exemption is among the lowest in the country. For people without expensive homes, they are better off filing bankruptcy before they have been in Florida for two years. They will not receive the benefits of using prior state’s exemptions unless they or their attorneys are aware of this rule; unfortunately, too may people are unaware.

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

Bank Accounts In Trust For Others

Many people set up bank accounts for their minor children under Florida’s uniform gift for minors act. When a parent files bankruptcy all bank accounts in their name is generally part of the non-exempt bankruptcy administration. However, an account which a parent owns in trust for a minor child is usually not considered the parent/debtor’s property as the parent is acting as trustee for the minor child who is not old enough to have their own bank account.

A slightly different situation arose at a creditors meeting this week. My client told the trustee that her mother established and funded a bank account for the debtor’s child- the mother’s grandchild- and named the debtor as trustee over the account. The child/grandchild beneficiary was over 18 years of age. The beneficiary was entitled to the money in the account. The account is not under the uniform gift for minors act because the beneficiary is not a minor. I think I was able to persuade the bankruptcy trustee that the account is not the debtor’s property. Under Florida law, you can create an unwritten trust over personal property. The grandmother created an express, oral trust for her grandchild and made the debtor trustee. The debtor did not fund the trust and had no equitable interest in the account. In my opinion, the money in this account should not be part of the bankruptcy estate for the benefit of the debtor’s unsecured creditors.

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

Homestead Exemption Applied to Jointly Owned Property

Reader writes that he and his mother own a Florida condominium as joint tenants worth about $70,000 with no mortgage. His mother has lived there for several years. The reader recently moved to Florida and into the condominium. The reader used to live in New York which has a $50,000 homestead exemption. He wants to know what happens to the condo if he files Chapter 7 bankruptcy in Florida.

If the reader files bankruptcy he will use New York exemptions since he has lived in Florida less than two years. Even though his mother paid for the condo the Trustee will try to attribute ½ the value ($35,000) to the reader because he is now co-owner. Technically, the mother made a gift of half the equity when she put him on the deed. However, his N.Y exemption of $50,000 will be applied to only his share of the equity ($35,000) . The condo should be exempt property in his bankruptcy.

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

Homestead Sale in Chapter 7

Chapter 7 debtors frequently ask if they can sell their house after filing bankruptcy and whether the court will provide an Order that their house is exempt homestead for the benefit of a title company writing title insurance. If you claim your residence as an exempt asset on your bankruptcy petition the trustee has a limited time after filing and your meeting with the trustee to challenge the claimed exemption. If the trustee does not challenge your homestead, or if the trustee challenges the exemption and the court upholds the exemption, then your house is exempt and may be sold. The exemption of the homestead, whenever finally determined, dates back to the date of filing bankruptcy.

Bankruptcy courts in Florida are reluctant to issued Orders stating the homestead is exempt when the trustee fails to make a challenge. Courts expect attorneys for the title companies to know the law and know when the homestead is exempt as a matter of bankruptcy law and procedure. The bankruptcy judges believe it is not their job to issue "comfort orders" to title companies, prospective buyers, or other parties who may be involved in the sale and purchase. The bankruptcy debtor sometimes must educate their real estate agent or title insurance company in order to close the sale of their homestead after filing Chapter 7 bankruptcy.

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

Bankruptcy and Family Car Loans

I was asked today to address a very common mistake people make before filing bankruptcy. The prospective debtor borrowed money from his parents to buy a car. The car was titled in the debtor’s name. The debtor signed a promissory note for the amount of the loan made payable to his parents, but the parents did not record a lien on the car title. Now the debtor is considering bankruptcy, and he wants to know how the legal status of his debt to his parents for the car. He also asks whether his parents should put a lien on the car title before he files bankruptcy.

This is not a good situation for either the debtor or his parents in bankruptcy. The car loan from his parents is unsecured. The debtor may pay his parents back if he wants to, but technically, the parents cannot ask for repayment after the bankruptcy is filed. The car is unencumbered, and if there is equity in the car, the trustee will demand payment for the equity over the $1,000 Florida car exemption. Also, as the car loan is not a secured debt, monthly payments to his parents will not count a secured debt in the debtor’s means test calculations which will make it more difficult for the debtor to qualify for Chapter 7 bankruptcy. If the debtor sells the car and purchases a new car subject to a car lien he still may be liable to the trustee for the excess equity he received from the loan and reinvests in a new car.

The lesson is that if you borrow money from a family member to buy a car, house, or any other item, make sure you document the loan the same way a bank would. If it’s a house, have the family member record a mortgage; in the case of a car, put the family member as a lienholder on the title. This protects both you and your family member if you later have creditor problems.

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

Protection of Foreclosure Proceeds

I discussed the following case with a creditor attorney. A debtor loses his house at a foreclosure sale. The foreclosure sale price brings in enough money to pay off the mortgage and provide excess funds of $20,000. The funds are held temporarily in the trust account of the debtor’s attorney. Next, the debtor files bankruptcy. The question is whether the excess funds from the sale are exempt.

Florida law protects the proceeds from the sale of a homestead so long as the debtor intends to reinvest the proceeds in a new homestead. No case has distinguished proceeds from a voluntary sale from foreclosure sale proceeds. Therefore, the foreclosure proceeds should be exempt if intended for a new homestead.

Insurance Proceeds Received After Filing Bankruptcy

The bankruptcy estate extends to assets acquired after the filing of the petition in the case of money inherited from an estate, a trust, or an insurance policy on the life of a deceased relative. Most debtors are surprised when the trustee ask them to turn over money the acquired after filing bankruptcy because the general rule is that debtors may retain money earned or received after the filing date.

I recently represented a client whose father passed away a shortly after the child’s bankruptcy. The debtor found that the father had made the debtor a beneficiary of a life insurance policy, and the debtor testified about the policy at the trustee meeting. When the trustee made demands for the insurance proceeds the debtor resisted by giving a series of excuses why the debtor could not get the insurance proceeds. After a few months of requests and excuses the trustee filed an adversary complaint to deny the debtor a bankruptcy discharge and for an order to turnover all the insurance proceeds. A week later the debtor got the insurance money and paid the trustee. In fact, the trustee was interested in the turnover of the amount of insurance proceeds to pay creditors. The trustee did not require that the entire policy benefit be tied up in the bankruptcy proceeding and permitted the debtor to keep some money over an above the claim amount for the debtor’s personal expenses.

The point of the story is that insurance proceeds received within the initial months after bankruptcy filing are part of the bankruptcy estate under the law. This provision of the law is designed, in some part, to prohibit someone from filing bankruptcy when they anticipate a recovery from an estate so as to deprive their creditors of claims they might otherwise have when the debtor received said proceeds.

posted by Jonathan Alper, bankruptcy attorney, Orlando, Florida

Bankruptcy of A LLC Member

An attorney asked me about a prospective bankruptcy client who owned one-third of a Florida limited liability company. The client was sure that their filing bankruptcy would automatically terminate the LLC. The LLC did not have an operating agreement.

Where an LLC does not have a written operating agreement the LLC operates under default provisions provided by Florida Statutes. Florida Statute 608.411 (2) provides that as long as there is at least one remaining LLC member, the bankruptcy, death, expulsion, retirement or resignation of a member , or any other event that terminates the continued membership of that member shall not cause the LLC to be dissolved. Therefore the bankruptcy of a LLC Member does not dissolve the LLC as long as there remains at least one member in good standing.

Can A Debtor Operate His Wholly Owned Corporation After Filing Personal Ch. 7 Bankruptcy?

I recently filed a bankruptcy for a relatively wealthy individual. The debtor’s assets included 100% of the stock in an operating business with assets including real property. The question arose concerning the debtor’s operation of the business after filing personal bankruptcy. Since the debtor’s stock is part of the bankruptcy estate, does the trustee by virtue of owning all the stock assume control of the business. Or, can the debtor as president of the business operate the business including disposing of business assets after filing. In this case, the trustee took the position that the debtor’s bankruptcy did not act as a stay against business operations. Until the trustee as the new stockholder held a stockholder meeting to elect replacement officers and directors the trustee indicated that the debtor could continue normal business operations without violating the bankruptcy stay.

Exemption of Child Support Payments

A prospective bankruptcy debtor asked whether child support payments received from an ex-spouse were protected after they were deposited in the debtor’s checking account. I have never researched this issue, but I suspect the money is not exempt in bankruptcy. Future child support payments are not part of the bankruptcy estate. Child support money paid prior to filing and commingled with other banking funds probably could be claimed by the bankruptcy trustee. Florida statutes do exempt proceeds from particular assets as well as the asset itself. For example, proceeds from an annuity if deposited in a bank account remain protected after they are paid to the beneficiary. Proceeds from the sale of homestead is protected under certain conditions. Exempt wages remain protected in wage accounts at banks. Otherwise, proceeds from exempt assets lose their protected status once they are distributed to the debtor and deposited in bank accounts.

Tenancy By Entireties Protection in Out of State Bankruptcy

I received an inquiry about a person filing bankruptcy in another state owning a parcel of real property in Florida jointly with his spouse. The state where the bankruptcy was filed does not recognize tenancy by the entireties as a form of ownership exempt from creditors. Is the Florida property subject to sale by the bankruptcy trustee?

This question involves conflicting law between two states, one state which does not recognize tenancy by entireties and Florida where the property is located and where TE property would be exempt in bankruptcy so long as the debtor and spouse do not have joint unsecured debts.

The general conflict rules is that the law applicable to real property is the laws of the state where the property is located. The general bankruptcy rule is that the bankruptcy court applies the laws where the debtor files. My guess is that in this case tenancy by entireties would protect the Florida property from administration in the foreign bankruptcy proceeding, again assuming no joint unsecured debts.

Substantial Abuse Under The New Means Test

Under the new bankruptcy law the "means tests" evaluates eligibility for chapter 7 bankruptcy. The means test measures the debtor’s ability to repay debts by considering his total household income and expenses. Where a single debtor is unemployed, but his spouse is employed and makes substantial salary, the spouse’s salary could disqualify the unemployed debtor from Chapter 7 under means test formula.

I presently am preparing a bankruptcy for such an employed debtor with a gainfully employed spouse. Together, this couple makes a lot of money. However, the bulk of the unemployed debtor’s debts represented credit cards used to fund a failed business. Under the new bankruptcy law, debtor’s whose debts are primarily business debts are exempted from the means test. Therefore, the spouse’s income should not disqualify this debtor from filing chapter 7. However, under the old law a debtor’s bankruptcy might be subject to dismissal if it were found that the filing constituted a "substantial abuse" considering the debtor’s ability to repay debts. The extent to which the income of a non-filing spouse was considered in "substantial abuse" was not clear. This case will be interesting because it will present the issue of whether a debtor exempt from the means test by the business debt exception could still find his bankruptcy challenged as substantial abuse under the new law because of the income of his non-filing spouse.

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

Using 401k Loans To Qualify For Chapter 7

People with financial problems often tap into retirement accounts to pay necessary expenses. Consumers with 401k plans sometimes have the choice of borrowing from their plan or taking distributions. Taking loans, rather than distributions, from a 401k can have advantages if you ultimately have to file Chapter 7 bankruptcy. Distributions trigger some income tax liability and possible early withdrawal penalties. If you file bankruptcy the balance in the 401k would be exempt. If you take a loan from your 401k, the amount of monthly payments to your plan are deductible for purposes of calculating your disposable income under the means test. Sometimes it pays to purposefully take a loan just prior to bankruptcy to pay medical expenses , health insurance, past-due secured debts, and/or bankruptcy attorneys fees in order to show a significant 401k loan payment under the means test calculation. This is an example of how the new law calls for advanced bankruptcy planning for debtors above median income who are therefore subject to means testing.

Use of Exempt Property During Bankruptcy

All personal Chapter 7 bankruptcies claim some property as being exempt from the bankruptcy estate. The Chapter 7 Trustee and creditors have a limited period of time, 30 days, to object to the Debtor’s proposed exemptions. If they object, an adversary proceeding is created and the Debtor must defend his objections in bankruptcy court.

What happens when the Trustee and creditors miss the 30 day deadline, but upon filing a late exemption it appears clearly the debtor’s claim of exempted property has no basis and the property in question is part of the bankruptcy estate to be sold for the benefit of creditors.

The Supreme Court of the United States has strictly applied the 30 day exemption window. See: Freeland & Kronz, 503 U.S. 638. Bankruptcy courts have held that when a debtor lists property as exempt from the estate, and neither the trustee nor the creditors object during the 30-day time period, the property no longer belongs to the estate and the debtor may use it as his own. This means that if no party objects to your claim of exemption within 30 days after the meeting of creditors, you , as debtor, may freely sell or encumber the property without need for permission from the Trustee or the court. This often comes into play when a debtor claims a homestead exemption and seeks to sell the property while in bankruptcy. Thirty days after the creditor meeting the debtor can sell his homestead, obtain title insurance for the buyer, without leave of the bankruptcy court.

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

The Means Test Does Not Affect Everybody

The part of the new bankruptcy law which has received most attention is the "means test." The means test is a mathematical formula that determines your qualification to file a Chapter 7 bankruptcy based on your income and expenses and other applicable special circumstances. Individuals that do not pass the means test because they are deemed able to repay part of their debts must file a Chapter 13 bankruptcy in lieu of a Chapter 7 liquidation.

Most people do not understand that the means test applies only to those individuals whose debts are primarily consumer or household debts. Individuals whose debts are primarily business or investment related can file Chapter 7 without regard to means test qualification. Many individuals who seek Chapter 7 protection have incurred debts in connection with a failed family business or extensive losses in the stock market. These people are exempt from the means test. Professionals who seek bankruptcy protection primarily from malpractice judgments also are exempt from the means test.

If you are facing financial problems because of a business or investment reversal the new bankruptcy law has relatively little effect on your ability to file Chapter 7 bankruptcy.

posted by Jonathan Alper, asset protection and estate planning attorney, Orlando, Florida

Chapter 7 Bankruptcy and Business Debts

The new bankruptcy law imposes a "means test" to determine if certain debtors are eligible to file Chapter 7 bankruptcy. Only debtors who, according to the means test formula, lack the ability to repay substantial portion of their debts may file Chapter 7.

Most people do not yet understand that the means test applies only to consumers. Consumers for bankruptcy purposes are people whose debts are primarily consumer related. People who incur most of their debts from business are not subject to the means test, and they may file for Chapter 7 without application of the means test formula. People who find themselves insolvent because they borrowed money on credit cards to support a business or an investment, or people who seek bankruptcy protection from personal liability on business related debt can file Chapter 7 under the new bankruptcy law regardless of means test standards.