The Florida Bankruptcy Law Blog

Bankruptcy Treatment Of Personal Injury Claims

The following is a guest post by New Jersey attorney Emily Kreifels of Console & Hollawell P.C. in Marlton, New Jersey

I’m always saddened when a client who has been seriously injured faces financial issues in addition to health issues. Unfortunately, health and money problems frequently go hand in hand. In addition to dealing with mounting medical bills you may not be able to work. If you don’t work you don’t get paid, or you get paid a small portion of your previous earnings through disability insurance. In situations like these, your debt may grow until it far outweighs your assets. You may no longer be able to keep up with your bills. When financial problems become severe, you may need to file bankruptcy.

If you’ve filed a personal injury lawsuit but also need to file bankruptcy, you may wonder how this will impact your case. You may be under the erroneous impression that filing bankruptcy means that you lose every cent and possession you own. What you might not know is that there are certain “exemptions,” or property you are allowed to keep.

Depending upon your situation, you may be able to protect your lawsuit, or at least a portion of it. Depending upon the laws in your state, personal injury compensation may be exempt up to a certain amount. For example, in New Jersey, personal injury compensation is exempt up to $17,425. You may receive additional personal injury revenue if in compensation for future earnings. Workers compensation benefits and death revenues for a person you depended upon may also be exempt.

When you file bankruptcy all of your assets, including your personal injury suit, become property of your bankruptcy estate. In order to claim an exemption, you must first list the asset. If the asset is not disclosed, you can’t exempt it.

There are a few other good reasons to include your personal injury case in your list of assets. First of all, it’s illegal not to. Second, if you fail to disclose your personal injury case in your bankruptcy filing, you can bet the insurance company’s attorney will try to get your case dismissed.

Chances are, your bankruptcy attorney and your personal injury attorney will be two different individuals. In order to ensure the best outcome for both your bankruptcy and your personal injury suit, make sure that both attorneys are aware of the other situation. You can recover from both bankruptcy and injury, but it helps to have the right legal guidance. For more information on how to protect your personal injury claim during bankruptcy, contact a New Jersey accident lawyer (link to http://www.consoleandhollawell.com/new-jersey/accident-injury-lawyers today.

Bankruptcy Debtors Cannot Intentionally Delay Important Petition Amendments

The bankruptcy rules provide that a debtor may amend his bankruptcy schedules at any time prior to the case being closed. The debtor can file amendments which claim additional exemptions or new theories of exemption even when property was not claimed as exempt on the debtor’s initial schedules. 
There are, however, some limits on the debtor’s ability to make amendments. A creditor or trustee may object to an amendment which is made in bad faith or which prejudices the creditors. Of course, any amendment which increases the debtor’s exemptions will prejudice creditor recovery, but that is not what the rule refers to. An amendment may be in bad faith or prejudicial if the delay is purposeful or of the delay causes the trustee and creditors to spend significant time and money pursuing issues which are eliminated by the late amendment. 

A debtor should not be permitted to hold an amendment “in his pocket” while watching other parties spend their resources litigating issues or pursuing assets which the debtor knows will be made moot by the planned amendment. In such cases, the administrative expenses incurred by the trustee and others will be wasted and will reduce the money available for distribution out of estate assets. This type of delay in amendments, whether intentional or negligent, is prejudicial and will usually be denied. 

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

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

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

Chapter 13 Plan Payments And Increases In Debtor's Income

Most people are optimistic about their future including most of my clients who file Chapter 13 bankruptcy. People believe, or hope, that bankruptcy’s protection will lead them to increase their future salary or business profits. A common question is whether a Chapter 13 debtor’s increased future income will make their Chapter 13 plan payment increase. My clients often tell me that there is no incentive for them to seek better employment or work harder at their business if all the increased income goes to the Chapter 13 trustee.

Creditors and the Trustee’s office have a different view of a debtor’s future success. The law requires Chapter 13 debtors to pay all their disposable income to their Chapter 13 plan and their creditors. As a debtor is able to pay more of his debts he should be required to do so through increased plan payments. Chapter 13 debtors are required to submit their annual tax returns during the term of their plan so that the trustee can monitor their income.

In practice, the Chapter 13 trustee applies a common sense approach to changes in debtor’s income over the course of their repayment plan. Increases in monthly income of $500 or less ($6,000 annualized) typically will not cause an increase in the debtor’s plan payment level. Also, a debtor reporting more substantial increases in income has the opportunity to show evidence of offsetting increases in necessary expenses.

Debtors who honestly report changes in income and expenses will be treated fairly in Chapter 13 bankruptcy.

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

Chapter 13 Cram Downs Of First Mortgages On Investment Real Estate

Chapter 13 debtors can cram-down mortgages on investment property to the amount of the property’s fair market value. People considering Chapter 13 to remedy upside down investment properties often ask how the cram-down works. Their questions cover issues such as when the cram down is final, does Chapter 13 affect their interest rate, and how does Chapter 13 cram-down deal with arrearage of past due payment on the investment property mortgage.

Here are some general answers to these common cram-down questions. Cram down differs from stripping a second mortgage on a primary residence. A second mortgage strip is final and permanent  at the end of the Chapter 13 plan. An investment mortgage cram down is temporary. Our courts will cram down an investment mortgage for two years during which time the debtor is expected to refinance or pay off the mortgage at the cram down value. The two year time limit can be extended for reasonable grounds such as, for example, time required to complete loan applications or closings.

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

Mortgage Cram-Downs On Investment Property In Chapter 13 Bankruptcy

Chapter 13 permits debtors to “cram down”, or reduce, the amount of a mortgage on investment property to the property’s current market value. A client recently asked me if the Chapter 13 cram down eliminates past-due mortgage payments and if the “cram down” can include a reduction of the mortgage interest rate in addition to the mortgage balance.

My experience is that a Chapter 13 plan will not eliminate past-due payments but can add the arrearage to the loan balance after cram-down. The Chapter 13 does not reduce mortgage interest rates unless the rate is unreasonably high, such as interest rates typically associated with “hard money” loans from private lenders.

Remember that Chapter 13 cram-downs of investment property does not permanently strip part of a mortgage unless the debtor refinances the property during the course of the Chapter 13 plan. The investment property strip does not continue after Chapter 13 discharge.