The Florida Bankruptcy Law Blog

Bankruptcy Court Says No Liability For Assisting A Debtor's Fraudulent Transfers Or Conversions

A fraudulent transfers and fraudulent conversions  prior to filing Chapter 7 bankruptcy can be detrimental in two ways. First, the Chapter 7 trustee can reverse the transfer or conversion, take the property back from the transferee (recipient), and sell the property for the benefit of your creditors. In addition, egregious fraudulent transfers within two years of filing Chapter 7 bankruptcy can cost the debtor the bankruptcy discharge. If discharge is denied the transferred property will be recaptured and sold and none of the debtor’s debts will be wiped out so that the creditors could pursue collection after the bankruptcy is over.

Fraudulent transfers involve a transferee and drag the transferee in to the debtor’s bankruptcy. In more complicated transfers other people often assist the debtor’s transfers. These assistants include, for example, the debtor’s attorney, his business partners, financial professionals and friends. Can these assistants also be liable for damages because they assisted with a debtor’s fraudulent transfers or conversions?

Court Liberalizes Homestead Exemption For Foreign Debtors Living In Florida Properties

Florida's  homestead exemption seems simple, but in some respects the exemption involves complicated legal issues. One such issue is the relationship between the Florida homestead protection and a debtor’s status under U.S. immigration laws. There are many bankruptcy cases were a debtor’s immigration status disqualified him from a bankruptcy homestead exemption because the debtor had not yet achieved the legal right under our immigration laws to reside permanently in the U.S. and Florida.

The homestead exemption requires that the debtor intend permanently to reside in his Florida residence. Bankruptcy courts concluded that a Florida debtor could not intend permanently to reside in a Florida home if the debtor had any less than a “green card” entitling him to permanent U.S. residency.

A Florida appellate court has liberalized homestead exemptions for temporary U.S. residents. The court said that a foreign citizen’s eligibility for Florida homestead depends on his intent rather than the U.S. Immigration Service’s rules. A debtor’s eligibility for homestead is based on the all the facts relevant to his intent to reside permanently  in his house even if the debtor has not yet received a “green card.” The court upheld the homestead exemption of a foreign debtor who resided in a Florida property since its purchase, had a visa giving him the right to reside in Florida, and was actively pursuing permanent resident status.

Bankruptcy court’s application of the homestead exemption is based on non-bankruptcy Florida law. This Florida court’s interpretation of the homestead should affect foreign debtors’ homestead exemptions in Florida bankruptcy courts. Grisolia v. Pfefer, 2011 WL 5864806.

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.

Case Illustrates Difficulty Of Protecting In Bankruptcy Pre-Filing Transfers Of Exempt Assets

There are so many reasons to stay away from bankruptcy- here is one more. In state court proceedings a debtor may do anything he wants with his exempt assets. In asset is exempt under Florida law a debtor can transfer it to a family member, put it in a trust, or sell it and by an alternative exempt asset. The definition of “assets” in our fraudulent transfer statutes specifically excludes exempt assets.

Not so in bankruptcy court. Bankruptcy trustees can attack pre-petition fraudulent transfers under either of two theories. Under Bankruptcy Code Section 544 a trustee can reverse a transfer which could be deemed a fraudulent transfer under the state’s fraudulent transfer laws. There is a four year look-back in Florida and most other states. Or, a trustee can attack a fraudulent transfer under Section 548 of the Bankruptcy Code which has a two year look-back.

A recent bankruptcy case decision pointed out that more than one federal appellate court believes that a bankruptcy trustee can attack and reverse transfers of assets within two years of a bankruptcy filing even if the assets are exempt under state law and could be claimed exempt on the debtor’s bankruptcy schedules. The courts reason that a trustee can seek to recover the transferred asset from the transferee because the transferee cannot claim the debtor’s exemptions and that the debtor cannot claim the exemption under the Bankruptcy Code  until the debtor actually files bankruptcy.

This is a harsh interpretation of Section 548 to debtor property which is off-limits to creditors after bankruptcy or in state law collections. The argument is another example of something I frequently advise my client and frequently mention on this blog; bankruptcy is the last resort if asset protection fails completely.  In re Lumbar, 2011 WL 4809870

Bankruptcy Debtors Eligible For Wildcard Exemption If They Keep Homestead And Try To Modify Mortgage

Two married Florida debtors own an upside down homestead property. They are seeking mortgage modification in the hopes of holding on to their home. They file Chapter 7 bankruptcy and do not claim their house as exempt homestead because there is no equity to exempt. The debtor’s Statement of Intention stated that they wanted to retain the homestead property. The debtors claimed a “wildcard” exemption which is available to debtors who do not receive benefits of the homestead exemption. The bankruptcy trustee argued that the debtors could not use the wildcard because they intended to retain the homestead and reaffirm the mortgage debt.

The above facts were considered by a Florida bankruptcy judge. The judge held that these banrkuptcy debtors were eligible for the wildcard exemption ($4,000 per peson) because they did not receive homestead benefits even though they intended to retain the homestead after bankruptcy and engaged in postpetition efforts to modify the mortgage. The court pointed out that surrender of a homestead to the mortgage company is not required to claim wildcard benefits.  In re Rodale, Case No. 3:10-6845

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.

Foreclosure and Stay Relief Denied When Mortgage Lender Cannot Demonstrate Proper Assignment of Mortgage Instruments

As most know, during the years leading up to the real estate crisis mortgage lenders originated individual home loans and then assigned packages of these loans to investors who converted the packages to mortgage securities. The assignment process involved an intermediary organization called Mortgage electronic Registration System, Inc. (“MERS”) which held millions of mortgages as an agent of the original lender and essentially served as a mortgage storage bin to facilitate mortgage transfers during the securitization process.

Attorneys defending mortgage foreclosures often as part of their defense challenge the plaintiff lender’s standing to bring a foreclosure suit. The challenge is based on whether the mortgage was properly assigned from the original lender to the investor that holds the mortgage and is bringing the foreclosure action. A recent New York bankruptcy court decision denied a mortgage lender relief from the bankruptcy stay to pursue a foreclosure because the court found that the lender could not properly substantiate his legal rights as assignee of the original lender and MERS.

In this case the original lender assigned the mortgage note to MERS as “nominee”. The assignment provided that MERS “holds only legal title to the rights” in the mortgage. MERS assigned the note to another lender as a trustee of an investment trust. The court held that the assignment from MERS to the trustee did not adequately evidence what rights in the note were being assigned. The court concluded that the assignee lender/trustee lacked standing to foreclose the mortgage and was not a party in interest. Therefore, the court denied relief from the banrkuptcy stay necessary for continuation of the foreclosure process in state court. In re Lippold Case No. 11-12300, Southern District NY.

Federal Circuit Court Liberalizes Chapter 13 Stripping Of Unsecured Junior Mortgages

Because of substantial decline in Florida real estate values Chapter 13 bankruptcy is commonly used to strip off second and third mortgages from the debtor’s upside down  primary residence. Junior mortgages are not stripped off the residence at start of the Chapter 13. If that were the case then homeowners could file the Chapter 13 to wipe out the junior mortgage and quit payments soon thereafter. No, debtor’s junior mortgages are stripped at the “back end”, that is, at the end of the Chapter 13.

There is a difference of opinion regarding whether the debtor’s junior mortgages are stripped off upon successful completion of the Chapter 13 plan or upon entry of the Chapter 13 discharge. Why does that make any difference since the discharge is entered when the debtor successfully completes the Chapter 13 plan payments.  It makes a difference because under the 2005 bankruptcy law debtors who file Chapter 7 bankruptcy are not eligible for a discharge in a Chapter 13 filed four years after a Chapter 7. A debtor can still file a  Chapter 13 within the four years and complete a bankruptcy plan, but he cannot get the Chapter 13 discharge.

If a Chapter 13 strip the junior mortgages upon completion of a Chapter 13 plan then debtors can file a Chapter 7 to wipe out credit card debt, and immediately following the Chapter 7 discharge they can file a Chapter 13 to address their junior mortgages on their upside down home. If the mortgage strip requires a Chapter 13 plan completion and a Chapter 13 discharge then Chapter 7 debtors have to wait four years to address their home mortgages.

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.