The Florida Bankruptcy Law Blog

Can Joint Bankruptcy Filing Claim Entireties Exemption When Spouses Have Separate Debts?

I interviewed a married couple wanted to file joint Chapter 7 bankruptcy. Each spouse had separate credit cards and no joint unsecured debt. They have assets owed jointly free and clear of debt. My first thought was that their joint assets would not be protected in a joint bankruptcy. Joint marital assets owned as tenants by entireties are protected from the debts of either spouse provided the spouses do not have joint unsecured debts.

Then, I considered the point that a joint bankruptcy does not mean joint debt. My understanding, from reading some cases in the past, is that a joint bankruptcy estate is actually the joint administration of each spouse’s separate bankruptcy estate. If so, then debtor’s with separate debts filing a joint petition should be able to exempt their tenants by entireties property. I don’t recall ever filing a joint case with separate debt, but I think the analysis may work.

In any event, it will not be tested by these clients because at the end of our meeting they decided that just one spouse will file Chapter 7 bankruptcy. The filing spouse will exempt their entireties property.

Improving Means Test Results By Incurring Car Debt

When a debtor calculates a Chapter 7 means test analysis he is entitled to deduct from income transportation expenses associated with ownership of a car. All Florida debtors can deduct from income a general transportation expense which is approximately $250. There is another deduction associated with the expense of owning a car known as the “ownership expense.” The ownership expense is calculated using the debtor’s car payment and a fixed allowance of about $500. Based upon a recent court ruling, debtors who own a car free and clear of any liens are not eligible to take any ownership expense despite the obvious costs associated with owning a car in Florida. The car ownership deduction is limited to people with car debt.

This past week I provided legal services to a woman who is a bankruptcy paralegal in a high-volume bankruptcy office located in Illinois. We discussed how her office handles car expenses in the means test.  The attorney she works for recommends that prospective debtors who own cars outright get a very small car loan in order that the debtor qualifies for the car ownership allowance.

In Florida, for example, debtors get a $1,000 base car exemption. Most debtors today also qualify for a $4,000 wildcard exemption which can be applied to protect car equity. Assume a debtor in Florida owned outright a car worth less than his applicable exemption limit. Using the advice provided by the Illinois attorney, the debtor would get a very small car loan prior to filing bankruptcy, if and as necessary, to help him qualify for the means test. The small loan would not significantly affect his monthly household budget.  If the debtor’s car was worth more than the allowable exemption the trustee would demand payment of non-exempt equity.

Chapter 7 Bankruptcy Trustee May Challenge Increased Unsecured Debt Within Six Months Prior To Filing

Bankruptcy trustees seem to be getting tougher on debtors who incur significant credit card debts and large secured debt obligations prior to filing Chapter 7 bankruptcy. I am seeing challenges asserted against significant credit card charges within six months prior to filing bankruptcy. That does not mean that you cannot use a credit card for six months before you file. It means that large charges or a substantial increase in credit within the prior six months could draw scrutiny.

In my experience, more than half of my clients have increased unsecured borrowing in the months leading up to their bankruptcy. Some for good reason; some for not good reasons. Some people, after they see bankruptcy as a good option, will intentionally run up credit cards to buy things they want but do not need. These people are trying to take advantage of their creditors and the bankruptcy system; trustees should come down hard of this type of debtor abuse.

Other people file bankruptcy reluctantly after a financial setback such as a job loss, pay decrease, or unexpected large debt. These people will use credit cards to buy necessities because they hope that their fortunes will improve and they can avoid bankruptcy. In my opinion, such individuals should not be penalized for increasing debts.

However, as a practical matter, if creditors and trustee do not distinguish properly the good and bad reasons for credit card debt prior to bankruptcy these people with good motives are taking a big risk when they borrow in order to buy time to work out of their financial situation. If they are unable to increase income, or decrease expenses, these well-intentioned debtors may have recent debts challenged in Chapter 7 bankruptcy.

Cartoon Explains Chapter 7 Bankruptcy In Florida

For those blog readers considering  bankruptcy, I composed a video cartoon explaining the basics of of filing Chapter 7 bankruptcy in Florida. You are invited to watch and learn.

 

Thoughts About Car Valuation In Chapter 7 Bankruptcy

How much is my car worth? This a question asked by most bankruptcy debtor’s who plan to file Chapter 7 and own a car free and clear of any liens. Florida law exempts only $1,000 of car equity in most cases, and cars’ liquidity makes them a prime target of Chapter 7 trustees who seek to recover non-exempt assets for creditors.

My own clients have suggested many methods they intend to use to value their own non-exempt cars. Example valuation standards are: written appraisals from their personal used car “guy”; an average of the car’s wholesale and retail values; the bid they get at Carmax, the Blue Book etc. This past Tuesday I was at a creditors meeting and I asked a bankruptcy trustee how she, and other trustees she speaks with, determine the value of debtor’s automobiles. She said that most trustees she has spoken with use the “trade-in” or in the yellow NADA book. That’s the book the banks use for car lending. She said that some trustees use “loan value” which is close to the “trade in” value. Carmax provides the lowest valuation based on auction wholesale price.
If you plan to take a car through bankruptcy make sure you are “on the same page” and in the same value book as your bankruptcy trustees.

Bankruptcy For Small Businesses

These are hard times especially for small businesses. I frequently hear from small business owners who want to "file bankruptcy for their business." The small business owner usually has personally guaranteed most of his business debts. For some reasons, the troubled small business owner often thinks his first step in a bankruptcy solution is to file bankruptcy for his business. Then, he thinks, he may also file bankruptcy personally for his guaranteed debt and his personal credit cards. This is often the wrong strategy.

I read a good blog post on this subject by Maryland bankruptcy attorney Brett Weiss. People thinking of filing bankruptcy for their small business should read this article.  I agree with what Mr. Weiss has written. In most cases, corporate bankruptcy for a small business is not necessary- its a waste of the client's money.

Limited Homestead Protection Prior To Two-Year's Florida Residency

If you file Chapter 7 bankruptcy and own a non-exempt real property jointly with a non-filing co-owner (including your spouse) the bankruptcy trustee can for the sale of the jointly owned property regardless of the co-owner’s objection. The trustee’s authority to liquidate the debtor’s jointly owned property falls withing Section 363 of the Code. The trustee would split the sales proceeds with the non-filing co-owner. An interesting situation arises when the subject property is the debtor’s homestead owned by the debtor and occupied by the debtor and his non-filing spouse. Homestead protection is different in bankruptcy than it is outside of bankruptcy. Outside of bankruptcy full homestead protection vests upon occupancy whereas in bankruptcy full homestead protection does not fully vests for two years or more after ownership and Florida residency are established. Florida law fully exempts the owner’s homestead equity, and Florida law provides the non-owner spouse with a protected life estate in the home.

A Florida bankruptcy court commented on a situation where a debtor and family moved to Florida, and the husband bought a house. The husband filed Chapter 7 bankruptcy; the wife did not file bankruptcy. Under the bankruptcy rules the debtor was not eligible for Florida’s homestead exemption because he had not lived in Florida for two years. At the same time, the wife’s homestead life estate were vested under Florida state law. The issue addressed is whether the bankruptcy could liquidate the debtor’s non-exempt homestead property over the objection of the non-filing spouse.

Debtor Is Responsible To Report Changes In Finances Or Assets Up To Day His Petition Is Filed

I read a blog post by attorney Craig Andresen, a Minnesota bankruptcy attorney, discussing a  problem which occured  when a debtor’s assets or finances changed just prior to the attorney’s filing of the debtor’s bankruptcy petition. Most bankruptcy clients complete a bankruptcy questionnaire or sample schedules which they give to their bankruptcy attorney’s office for preparation of a bankruptcy petition. When the debtor signs the final petition he is swearing to a financial situation that exists when the signs the petition and not the financial facts when he completed the questionnaire. It is the debtor’s duty to inform the attorney of any changes in his assets or financial situation up to filing the petition.

Second Mortgage Lender More Likely To Pursue Deficiency Judgment

I have often written about mortgage deficiency judgments pointing out that up to now few institutional mortgage lenders are pursuing deficiencies in Florida. Borrowers should distinguish between personal liability on first and second mortgages. When either the first or second mortgage holder forecloses the first mortgage will likely take back the property. The first mortgages gets land which eventually can be sold. The second mortgage holder gets nothing at the foreclosure sale. If the first mortgage holder pursues a deficiency judgment (and again, this is usually not the case), the borrow can defend the action in part by arguing that the mortgagee has been satisfied by its repossession of the property. The borrower does not have this defense against the second mortgage. The second mortgage, having received nothing of value in a foreclosure, can sue on the mortgage note. The second mortgage can simply demand repayment of the promissory note underlying the mortgage without going through a foreclosure proceeding. The property value is irrelevant when the lender sues to collect the note.

Defending Mortgage Foreclosure

There are so many foreclosures and so few attorneys who know how to defend on behalf of the homeowner. I have referred many clients facing foreclosure to an Orlando real estate attorney named David Cohen. David has had good success delaying foreclosures and thereby giving his clients extra time to remain in their homes without paying any mortgages or taxes. David recently gave me an overview of his tactics and results fighting foreclosure suits on behalf of many people who were either unable to make payments or who decided to walk away from their homes with negative equity.