The Florida Bankruptcy Law Blog

When Can Chapter 7 Debtor Sell Or Rent Upside Down Property Listed On Bankruptcy Petition?

One of my bankruptcy clients owns an upside down investment property. The client listed the property as an asset with no equity and stated his intention to reaffirm the debt. If the trustee does not assert an interest in the property then the client will try to find a tenant and use the rent to pay the mortgage.

Forty five days after the trustee meeting the client wants to know when he can or should look for a tenant. He wants to know if the trustee has a time deadline to either pursue or abandon this property.

Bankruptcy trustees are supposed to abandon assets of inconsequential value. The trustee has until the bankruptcy is closed to make a decision. In the meantime, this debtor should not take any actions involving this property because the property is part of the bankruptcy estate until abandoned. The debtor, or any other interested party, may file a motion asking the bankruptcy court to order the abandonment of the property.

Does Parent's Chapter 13 Expense Schedule Include His Monthly Payments For Child's Car?

Here’s a relatively simple, but common,  question I was asked by email this past week. The writer makes payments on his daughter’s car titled in his daughter’s name. The writer (the parent) wants to file Chapter 13 bankruptcy and asks whether his monthly payment for his daughter’s car can be included in his expenses so as to reduce the amount of his monthly Chapter 13 plan payment.

The answer depends upon whether the parent signed the loan. If the parent co-signed the daughter’ s car loan then the parent may include as an expense the loan payment, maybe. The Chapter 13 trustee may challenge inclusion of the secured loan for a car which the parent does not use and which is not necessary. The extra car should not be paid for, in effect, by the debtor’s unsecured creditors. If the debtor’s plan pays 100% of his creditors then the car payment on the daughter’s car should not be a problem.

If the parent did not co-sign the loan then the parent’s monthly payment is in effect a gift to the daughter. The debtor cannot  include the gift as an expense because the debtor has no legal liability of payment. Even if the debtor proposes a 100% repayment plan the Chapter 13 trustee may disallow the “expense” so that the creditors are paid back in shorter time.

Should Annuity Proceeds Recently Received Be Included As Income In Chapter 13 Payment Calculation?

A prospective Chapter 13 bankruptcy client currently makes about $30,000 per year salary. He wants to file bankruptcy as soon as possible to stop an ongoing lawsuit. Based on his salary alone, he would make relatively minimal payments to his Chapter 13 plan and over the five year plan would pay about 20% of his unsecured creditors.

Many years ago this person won a personal injury law suit resulting in a structured settlement in the form of an annuity contract with a national insurance company. Three months ago he received the final annuity payment of $40,000. He asked whether the annuity payment will be treated as income for the purpose of determining the Chapter 13 plan payment. If included as income, his plan payment would increase substantially but he would not have any future annuity payments forthcoming to help pay the higher plan payment.

The annuity is an exempt asset. Florida statutes, and Florida case law, also exempt annuity proceeds even after the annuity proceeds are received and deposited in a financial account. The annuity and the proceeds would be exempt if the debtor filed Chapter 7.

The annuity payment three months prior to bankruptcy should not be treated as income. It is not a recurring payment. There will be no future annuity receipts during the Chapter 13 bankruptcy. Most importantly, to include the annuity receipt as income deprives the annuity proceeds of their exemption from creditors because the higher plan payment attributed to the “annuity income.” would effectively force the Chapter 13 debtor to pay during the Chapter 13 plan an part of the money received from the exempt annuity. Assets owned by the debtor at the filing date which assets would be  exempt in a Chapter 7 bankruptcy should not be captured indirectly in a Chapter 13 plan.

Can Debtors File Joint Bankruptcy Petition If One Spouse Is In Prison?

A woman called me to ask whether she and her husband could file bankruptcy while her husband was in prison. The woman is concerned about her husband’s inability to attend the trustee meeting. She said her husband could not initiate phone calls, and that the state will not transport him to a bankruptcy meeting or hearing. This woman said another bankruptcy attorney previously told her that she and her husband could not file bankruptcy until her husband was released permanently or on parole. I disagree.

Bankruptcy courts have been making it more difficult for debtors to avoid appearing at trustee meetings. For instance, medical excuses must be documented, and it is insufficient for one debtor spouse to simply show up with a power of attorney from the non-appearing spouse.

A debtor in prison  legally prohibited from attendance at the trustee meetings, but he is not otherwise prohibited from filing bankruptcy. I think there will be some arrangement made for this incarcerated debtor to file bankruptcy in a joint petition. For example, the debtor could receive a phone call at the meeting time and testify in the presence of a court reporter, or the trustee may simply permit the attending spouse to appear with the husband’s power of attorney. J

In my opinion even if the debtors need to file a motion and get an order from a bankruptcy court, something will be done to resolve the logistical  problem.

Homeowners Association Can Lien House For Post-Filing Monthly Dues

One of my bankruptcy clients calls my office to complain that his homeowner association has threatened to put a lien on his house for non-payment of HOA dues. The client complained that he had listed the HOA as a creditor on his Chapter 7 bankruptcy petition.

HOA dues are an ongoing debt, and new payments are due each month. The client’s Chapter 7 bankruptcy may discharge personal liability on HOA debts accrued prior to filing which had not been perfected by a lien. The bankruptcy does not discharge new dues assessments for months after the bankruptcy filing and during the bankruptcy case. Not paying HOA dues post-filing will result in a lien.

Look at it this way. You discharge debts; you do not discharge creditors. Listing a creditor in bankruptcy for your old debts does not stop the same creditor from pursuing debts to the creditor incurred after filing.

Debtor Wants To Pre-Pay Divorce With Non-Exempt Money Prior To Bankruptcy

A  prospective client from Miami  wants to file bankruptcy. He is in the process of getting divorced. He and his spouse each has an attorney. The spouses have a tentative oral agreement for the divorce which agreement includes payment of $100,000 of child support in equal payments over a four year time frame. The client’s principal asset is a money market account with $225,000. He asked me if he can pre- pay the child support in a lump sum to dispose of his cash and then file Chapter 7 bankruptcy. After all, he reasons, the child support is a priority debt in bankruptcy and would have to be paid before his unsecured creditors.

It’s ok to pay a priority debt , like taxes, before filing Chapter 7 bankruptcy,  but the debt has to be owed at the time it's paid. Generally, a debtor cannot pay a third party money for future debts not yet due. Payment without bona fide debt is a form of a fraudulent transfer.

Wachovia Bank Goes Wild: Freezes The Bank Account Of Bankruptcy Debtor's Boss

One of my clients files Chapter 7 bankruptcy. The client is an accounts manager for a one doctor medical practice. The doctor gave the client signature authority on the office account at Wells Fargo Bank so the client could easily pay the office bills. The account is titled in the name of the boss’s medical corporation. All the money in the account is from the medical practice receipts; the debtor deposits none of her personal money in the account. The account is set up under the business’s tax ID number.

After the client filed personal bankruptcy Wells Fargo froze the account because the debtor had signature authority. The doctor cannot pay his business bills with his own money. My office called a manager at Wells Fargo Bank and  wrote emails to Wells Fargo demanding they release the account freeze, but the bank ignored our calls and letters. Next, we wrote an email to the Chapter 7 trustee in the hope that he would contact Wells Fargo and get them to correct their error. The Chapter 7 trustee has done nothing. Perhaps the trustee is not interested in my client’s boss’s problem  because money in the business account is not part of the debtors bankruptcy estate.

Negotiating A Discount When Buying Back Non-Exempt Assets From Chapter 7 Trustee

If a Chapter 7 debtor has a significant amount of non-exempt personal property over the exemption limits the debtor has to buy back from the Chapter 7 trustee the non-exempt property. Non-exempt property subject to buy back includes automobiles and other types of personal property such as cash, stocks and furniture. Most trustees give clients up to 12 months to purchase the non-exempt property in monthly installments without interest. Most Chapter 7 debtors do not have enough non-exempt cash to make a lump sum repurchase.

A few debtor’s have the ability to pay cash immediately to buy back non-exempt assets because they have money in exempt retirement funds or can get a loan from other family members. Cash purchasers deserve a discount, and most trustee will discount the purchase price for debtors able to pay all cash in 20 to 30 days. Trustees provide discounts up to 25 percent off the full value of non-exempt cars or other property. The discount is warranted because a quick sale results in less work for the trustee and a quicker return to the creditors.  In other words, an immediate cash repurchase earns an 25% profit in one year. At that rate it pays to borrow the money from the Mafia* (*make-believe organization in the movies).

Disability Insurance Proceeds In Chapter 7 Bankruptcy

A prospective Chapter 7 bankruptcy debtor receives significant monthly disability insurance proceeds as a result of a disabling medical condition. He wanted to know how his disability checks would affect a bankruptcy. There are two issues with disability income. The first question is whether disability income is counted in the means test and second is whether disability money held in a bank account is part of the bankruptcy estate controlled by the trustee.

Social security disability does not count as income for purposes of Chapter 7 bankruptcy eligibility. Social security disability does not count when determining if the debtor is above or below median income, and if above median income, it is not income in the means test. Disability income under a private disability insurance contract is counted as debtor income. Medical expenses related to this debtor’s medical condition that caused the disability would be deductible in the means test to offset the insurance income.

All disability proceeds, social security or private insurance, is exempt under Florida statutes. Florida courts usually hold that disability income, as well as pension and retirement income, retains exempt status after it is deposited in a financial account as long as it is traceable. Disability income retained in this debtor’s bank account could be claimed as exempt.

Mortgage Insurance Benefits And Chapter 7 Means Test

A reader emailed me a question about how mortgage protection insurance is treated in the means test. The reader had a mortgage insurance policy that paid his monthly mortgage payments in the even he lost his job. The insurance covered payments for a number of months after which payments stopped. This reader found himself out of work and wanted to file Chapter 7 bankruptcy. He wanted to know if the money the mortgage insurance company paid to his mortgage lender would count as income for means test purposes.

I have never encountered this issue in any of my cases. My understanding is that insurance proceeds are “income” if the insurance is designed to replace or supplement lost income. Unemployment insurance, for example, is income for means test purposes. The mortgage insurance policy appears to have been designed to replace the debtor’s income temporarily in event of a job loss. For that reason, I think the insurance payments should be treated as income for Chapter 7 qualification.

The income is temporary income. If the mortgage insurance payments will cease within a reasonable time after the debtor files Chapter 7 I think the debtor would be permitted to file Chapter 7 regardless of means test result because it would be obvious that he will have no income at a time certain. The means test includes a “special circumstances” provision to account for debtor’s who face financial hardship which is not considered in the means test formula.