Florida Bankruptcy Law Blog

Bank of American Gets Tough On Credit Card Payments

People who bank at Bank of America and who have credit cards through the same bank are having problems when they don’t pay credit card payments. Bank of America, more than most banks, is enforcing a provision in their credit card agreements which allows them to take money out of customers’ bank accounts to pay the credit card. They are taking money without any advance notice. No client has asked me to review their Bank of American credit card documents, so I am assuming the bank has a legal contractual basis for their practice.

If you bank at Bank of American and have their Visa or Mastercard cards, and if think you may fall behind on credit card payments, you should consider moving your checking account to another bank. Even if you leave open the BOA checking account, open an account somewhere else and move most of your money. I don’t know if other banks have the same rights in their customer agreements. If you bank somewhere else you should find out whether your bank can automatically deduct credit card payments from your accounts at the same bank.

A bank cannot invade your checking account once you file bankruptcy.

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

Mortgage Deficiency Judgments: A Different Opinion From Creditors

In response to my statements on this Blog that most lenders do not pursue mortgage deficiency judgments, I received a email from an experienced collection attorney expressing a contrary opinion. The collection attorney stated that he knows that lenders will be pooling mortgage deficiency judgments and selling them to collection companies for pennies on the dollar. Credit card companies have an established practice of selling non-performing credit card debt at seep discount. This same attorney says that many borrowers who walk away from mortgages will be in for a big shock in the future when collectors who have purchased the mortgage companies deficiency rights surprise the borrower with legal action.

Whether or not the attorney’s prediction is correct will be seen in the future. As stated often, my own experience over the past few years is that deficiency judgments are rare, and most attorneys and bankers I have spoken with agree. Yet, if its economically practical to purchase mature deficiency claims then there might develop an industry to pursue some of today’s numerous homeowners walking away from their mortgages. The homeowner needs to be aware of all opinions and predictions in order to make informed financial decisions.

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

Did Transfer of IRA Proceeds Lose Protection Prior to Bankruptcy?

A prospective Chapter 7 bankruptcy client told me he had recently withdrawn substantial money from his IRA and had given the money to his adult son. The client intended to buy a house to be used as his new homestead, but he had bad credit. The son had good credit. The client gave the IRA money to his son so that the son could qualify to buy the house in the son’s name. Subsequently, the son would transfer title to the parents. The client withdrew the IRA proceeds and deposited the money in his own account before transferring the same money by written check to the son. The issue was whether the money in the son’s account is protected if the parent files bankruptcy. Was the transfer of the money to the son a fraudulent transfer?

This is one of those situations where innocent planning error could undermine valid substantive planning. The IRA was exempt from creditors and the bankruptcy trustee under Florida statutes. The IRA statutes do not expressly protect proceeds from IRA or other qualified pensions; in contrast, the statutes expressly protect annuity proceeds. There are some court decisions which hold that the legislature intended to protect the proceeds of retirement accounts, but the law is not clear.

There can be no fraudulent transfer of an exempt asset by definition. If the client transferred the money directly from the IRA account into the son’s financial account I do not think any creditor could attack the transfer as fraudulent if the transfer was a gift to the son. But, when the creditor withdrew the IRA money and deposited into his own financial account the money may have lost its exempt status because the IRA was converted into a normal bank account in the client’s own name. The subsequent transfer to the son could at least be challenged as a fraudulent transfer. .

Whether the transfer to the son is a fraudulent transfer depends on the parties’ intent. The client would argue that the intent clearly was to give the son exempt money from the IRA as a gift. A bankruptcy trustee might argue that the transfer was to the son, not as a gift, but to the son as a nominee or alter-ego of the debtor because the son was going to use the money to by a house for the debtor’s exclusive personal use. The money would be non-exempt at least until the new homestead was purchased and occupied. Like most fraudulent transfer issues, this situation depends on the particular facts and the testimony of the participants. This plan could have worked without challenge with more careful asset protection planning.

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

Income Tax And Bankruptcy

read over materials about asset protection from income tax debt which had been published by Larry Heinkel www.taxproblemsolver.com. . Larry is an expert in the area of income tax debt in bankruptcy. His article pointed out some common misunderstandings about tax debts. First, Florida’s homestead law does not protect homeowners from income taxes. A tax lien attaches to your homestead unlike a civil judgment. Next, Florida’s statutes prohibiting creditors from garnishing wages of the head of household does not protect against IRS collections. Also, a divorce decree which specifies which spouse is responsible to pay tax liability is not binding on the IRS. The IRS can go after either divorced spouse for the full amount of tax debt.

Discharging tax debt in bankruptcy is complicated. The general rule is that Chapter 7 bankruptcy can discharge taxes for which the tax return was due to be filed more than three years prior to the bankruptcy. The "due date" is April 15 following the tax year plus extensions. Larry Heinkel points out that there are many events which can extend the due date for purposes of bankruptcy analysis. Also, tax returns first filed within two years of bankruptcy or taxes assessed within 240 days of bankruptcy cannot be wiped out. Taxes in bankruptcy is a very complicated area which is why Mr. Heinkel’s services are in demand. Make sure your bankruptcy attorney really understands the income tax rules.

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

Chapter 7 Debtor Uses Investment Mortgage Debts To Pass Means Test

There has been a significant increase in bankruptcies by people facing default in one or more investment real estate mortgages. Many of these bankruptcy debtors are trying to protect themselves from deficiency judgments following foreclosures on investment properties. These debtors usually have household income above median income; their high income enabled them to qualify for several investment mortgages make decent incomes. Absent the debt service for one or more investment mortgages, they would have ample income to pay their ordinary consumer expenses. Many of these cases are raising interesting issues for calculating means test analysis.

These mortgage debtors usually plan to stop paying all their investment property mortgages after filing bankruptcy and allowing the banks to foreclose. Relieved of the debt service of the investment mortgages, these debtors have substantial net monthly income. This creates interesting issues when the debtors calculate their means test analysis. Secured debt requirements help debtors pass the means test. The more secured debt service a debtor has the more likely his net monthly income will justify a Chapter 7 bankruptcy. The question is whether these debtors can include in their means test investment mortgage debt service they plan to stop paying as soon as they file.

I have been calculating means tests including all investment secured debt. The means test asks for secured debt the debtor is contractually obligated to pay when he files bankruptcy. There is not exclusion for debt abandoned after filing. Regardless of the debtors intent to surrender the investment properties there is always the chance they he may sell the properties or change his mind after filing. It seems impractical to wait until the debtor makes up his mind about the mortgage debts and properties after filing. For these reasons, I think the debtor can use all existing investment mortgages to pass the means test even if he intends to keep none of the mortgage debt. I recall a bankruptcy case that reaches the same conclusion but I don’t have the citation.

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

Avoiding Tax Liability From Deed In Lieu Or Short Sale

Here’s another idea about dealing with the threat of deficiency judgments and the income tax consequences of a deed in lieu or short sale. At a social gathering over the weekend I had a conversation with Larry Kosto, a well-known creditor collection attorney, about how debtors can avoid income tax liability when a bank forgives debt underlying a mortgage. Larry said some of his creditor clients who are amenable to taking a deed in lieu or a short sale have entered into a written stipulation with the borrower that the value of the property surrendered is equal to the amount of the underlying debt. In such event, the lender is agreeing that it is fully satisfied by taking back the property. There is no deficiency liability. If the lender does not pursue a personal judgment against the borrower the borrower has not benefitted from taxable forgiveness of debt.

If you negotiate with your mortgage lender about voluntary surrender of the property see if they will stipulate that there is no difference in the amount of debt and property value to avoid potential income tax liability from debt forgiveness.

Canadian Citizen With Florida Property

A Canadian citizen ties to Florida inquired about filing bankruptcy in Florida . The caller owned a home in Canada with significant equity. He also owned a home in Florida with less equity, and he owned and operated a Florida business. He had guaranteed large amounts of business debt. The business is having financial difficult. The caller anticipates significant personal unsecured debt from the inevitable business failure

The caller could , if he wanted, file in Florida if he had a residence and property here. I suggested that the caller not file bankruptcy in Florida as he would face several problems. First, bankruptcy courts have jurisdiction over the debtor’s property outside the United States . Therefore, the trustee could seize and liquidate his valuable property in Canada (unless it was protected from creditors under Canadian law). The called stated he had not yet received a "green card" to permanently reside in the U.S. Under Florida law, he could not move into the Florida property as a homestead until he got the green card.

I suggested that if his business failed and he was sued personally that he consider abandoning the Florida property and move back to Canada. First, it will be more difficult for the trade creditors of a Florida business to find and sue this person in Canada. There may be ways to protect the Canadian home under Canadian law, but there is definitely no protection in Florida bankruptcy court. For people with assets, bankruptcy should be the last resort. Many people think bankruptcy court is friendly for debtors; in fact, in most cases where debtor’s have some assets the creditors as a whole do much better in bankruptcy court than they do trying to find and levy assets otherwise.

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

Is There Florida Homestead Protection in Canadian Bankruptcy

A Canadian man called me to discuss a bankruptcy he filed in Canada. The gentleman owned a parcel of real property on the west coast of Florida. He asked me if the property would be exempt from his Canadian bankruptcy proceeding under Florida’s homestead laws. He said he lived in Florida half the year, and that the house was his primary U.S. residence.

I told him his Florida property would not be protected in his Canadian bankruptcy for several reasons. He cannot get Florida homestead protection because he is a resident of Canada, and not a resident of the U.S. or Florida. Assuming Canadian bankruptcy laws are similar to U.S. laws, the bankruptcy court would have jurisdiction over the Florida property as bankruptcy captures all of the debtor’s assets regardless of their location anywhere in the world. If he tried to claim the property as Florida homestead, he could not file bankruptcy in Canada as his primary residence would be in the U.S.

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

Potential Debtor Asks: Should I File Bankruptcy Before Moving to Florida?

A caller said he was about to move to Florida from Iowa and needed to file bankruptcy as soon as possible. He wanted to know if he would be better off filing bankruptcy in Iowa before he left or waiting until he established residence in Florida. Under the new bankruptcy law, it does not matter.

Regardless of which state he chooses to file bankruptcy his bankruptcy will be administered under exemption Iowa’s laws. If Iowa has elected to apply its state exemptions, then Iowa’s exemption laws will determine what assets are part of his bankruptcy estate. If Iowa has not elected to apply its state exemptions, this debtor’s bankruptcy will proceed under the default federal exemption system. In either event, the debtor will not be entitled to claim Florida exemptions even if he moves to Florida and establishes permanent residency in Florida before filing. Under the new bankruptcy law, this person would have to wait two years after coming to Florida to file bankruptcy under Florida’s exemption law. He could file bankruptcy in Florida, however, as soon as he establishes that Florida is his primary residence.

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

Joint Filing By Spouses Living in Different States

A new bankruptcy client retained me today to file a joint bankruptcy petition. The husband moved to Florida from Massachusetts within the past year and currently resides in Florida. His current wife remained in Massachusetts for her job, and the wife is a still a permanent resident of Massachusetts. Under the new bankruptcy law, the husband may file in Florida provided that his bankruptcy proceeds under Massachusetts exemption law. The client’s first question is whether he and his wife can file a joint bankruptcy in Florida while they are domiciled in different states.

I believe the husband and wife can file a joint petition in Florida so long as one of the spouses is currently domiciled in Florida. Generally, two spouses living in different states an filing jointly must choose which state exemptions they want to use. The two spouses cannot divide, split, or stack exemptions of different states. In this instance, there is no exemption issues as both spouses must file under Massachusetts exemptions.

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

Bankruptcy Options For Failing Small Business

Small business experiencing financial problems generally speaking fall into two categories: the hopeless or the impaired. The hopeless business is one who has put itself on an errant business track which is leading inextricably to financial disaster. For that business, chapter seven liquidation is often the answer in order to avoid an avalanche of lawsuits from trade creditors and customers. The impaired business is a business in trouble, but one which can turn itself around with a little bit of help and time. The impaired business may be in financial difficulty, but it also usually has valuable assets. For the business with assets and with hope, Chapter 7 is not the answer.

The business in difficult, but with hope, has two options. One option is Chapter 11 which provides time through a reorganization plan. Chapter 11, however, is very expensive for the small business. Another option is avoiding bankruptcy and simply closing operations. The business is not dissolve; it just stops taking customers and collects old receivables. The owners then try to reconstitute their business in a new business entity. Creditors will attack the new entity as the alter ego of the initial , debtor entity. The owners have to establish sufficient business reasons to start a new entity for their business other than avoiding their prior creditors. One possible business reason is bringing in new owners, possibly, a new owner who invests money to help the business but who refuses to be saddled with debts of the old business. This type of business reorganization should avoid bankruptcy because bankruptcy trustees will be relatively more effective in pursuing claims against the newly formed business under theories of alter ego or fraudulent conveyance.

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

Bankruptcy And Future Credit Scores

A very common question is how long does bankruptcy negatively impact your credit rating. Most people believe that bankruptcy ruins your credit for seven years. This belief is based on the fact that the bankruptcy filing will be on your credit report of up to seven years. People considering bankruptcy think that it will be seven years or more before they can qualify for a new car or mortgage

Actually, the effect of bankruptcy on your credit is much shorter. Many of my former bankruptcy clients have worked for either banks, automobile finance companies, or mortgage brokers. These people evaluate credit for a living. For the most part, these clients tell me that their lending guidelines provide that a bankruptcy more than two years old will not disqualify prospective borrowers. If the former bankruptcy debtor has established reasonably good credit history after getting his bankruptcy discharge, most lender employees told me that the borrower will have a fairly normal credit score. Last week, a wife of one of my former bankruptcy clients consulted with me about herself filing bankruptcy. She said that her husband had established excellent credit within one year of his bankruptcy being completed.

Most people don’t realize that as soon as you file bankruptcy many banks will send you offers for new credit cards. Although the interest rate initially will be higher than normal, people in the middle of a bankruptcy still have the convenience of using credit cards. Bankruptcy is actually a credit-helper; after filing bankruptcy all debts and judgments are cleared away and your income ratios immediately improve. As long as you establish good credit habits after filing, your should see improved credit in a relatively short time after your bankruptcy.

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

Discharging Debts For Recent Purchase

Bankruptcy clients often ask me if its ok to buy a new car before they file bankruptcy because the bankruptcy will hurt their credit and make it difficult to find financing. I usually recommend that if the clients need a new car they do purchase it prior to filing bankruptcy. However, these clients have to continue making car payments after filing. In other words, if you buy a car or any other item with secured financing, you should expect to remain liable on the debt through and after bankruptcy.

One of my bankruptcy clients purchased an expensive car within a month of filing bankruptcy, and upon filing, surrendered the car to the creditor. Once the creditor sells the car the debtor will owe a substantial deficiency amount. The creditor will likely file an adversary proceeding to deny discharge of that debt. The debtor’s explanation is that just after he purchased the new vehicle a key employee quit his firm which lead to immediate financial problems. True or not true, it does not look good to an outsider.

Don’t incur significant debts, secured or unsecured, file bankruptcy soon thereafter, and expect to eliminate these debts in bankruptcy without a credible explanation and a battle with the creditor.

posted by Jonathan Alper, bankruptcy lawyer, Orlando, Florida

Business or Personal Bankruptcy

I received today a frequently asked question from the owner of a small business which was having financial problems where the owner was personally liable for many of the business debts. In this common situation, the owner usually wants to know if the bankruptcy solution involves a personal bankruptcy, a business bankruptcy, or both. In most cases, I advise people to start with a personal bankruptcy, and in most cases a business bankruptcy is unnecessary. Regardless of what happens to the business the owner cannot get a new start unless he discharges his personal liabilities in bankruptcy.

The business bankruptcy does not discharge any debts. Only individuals receive a bankruptcy discharge. A business bankruptcy functions more like a receivership. The bankruptcy trustee assembles business assets, liquidates the assets, and distributes available proceeds to business creditors. A business filing bankruptcy is still legally liability to its creditors after going through bankruptcy. Business bankruptcies are useful for small business that want to avoid defending multiple lawsuits and collection effort from business creditors by turning over asset liquidation to the bankruptcy trustee.

The owner of a failed business can move on in life without bankruptcy if the owner is not personally liable on business debts. However, the owner will not find relief from any of the business debts if he is personally liable until filing personal bankruptcy. For these reasons, I usually try to help the small business owners with a single personal bankruptcy if possible.

posted by Jonathan Alper, bankruptcy attorney, Orlando, Florida

Dischargeability of Criminal Restitution

People who are ordered to make financial restitution to crime victims sometimes inquire whether or not court ordered restitution is dischargeable in bankruptcy. The bankruptcy law amended the provisions for Chapter 13 to make all restitution non-dischargeable. Chapter 7 bankruptcy has different rules depending upon whether restitution is payable to the state or to private parties. A debtor can wipe out in Chapter 7 bankruptcy restitution debt ordered by a state court owed to a private party who was victim of the debtor’s prior criminal act. However, any restitution payable "to and for the benefit" of a governmental office cannot be discharged in either Chapter 7 or Chapter 13. If restitution to a private party is a condition of probation, it is possible that the state court may be able to revoke probation if restitution is not paid after filing Chapter 7.

Tenants By Entireties Protection in Bankruptcy Proceedings

The protection afforded tenants by entireties property in bankruptcy court is different than in state court. All TE property is protected in state court from the debts of either spouse. In Chapter 7 bankruptcy, the debtor’s TE property is unprotected and is part of the bankruptcy estate available to creditors to the extent the debtor and his non-filing spouse have any joint debt. I represented a debtor who claimed TE exemptions and had no joint credit cards. I thought the TE exemption would protect jointly held property. However, upon examination by the trustee the debtor stated that he and his spouse owed IRS taxes for the previous year. The debtor had not disclosed the tax liability on schedules because they were aware that the IRS debt was non dischargeable.

The trustee cleverly asserted that the joint IRS debt exposed the debtor’s TE property to the extent of the tax obligation. The case illustrates that tenants by entireties protection is relatively unreliable in bankruptcy proceedings. I believe it is an exemption of last resort. Debtors often forget to list joint unsecured debts which they are not interested in discharging in bankruptcy. Joint unsecured debts do not affect TE protection outside of bankruptcy in state court collection proceedings.

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

Doubling Homestead Prior to Filing Bankruptcy

There is a fine line between permissible pre-bankruptcy planning and impermissible fraudulent conveyances. The new bankruptcy law’s homestead rules provide an interesting example. The new bankruptcy law exempts $125,000 of homestead equity acquired within 40 months prior to filing. Homestead interests acquired prior to 40 months, or 1215 days, is exempt in Florida. Most attorneys interpret the new law to double the exemption up to $250,000 where a home is jointly owned by husband and wife where the spouses file a joint bankruptcy petition.

In some cases, a married couple own their homestead in the name of one of the spouses individually. If the spouses faced the prospect of a joint bankruptcy to discharge unsecured debts, transfer of the homestead title to joint ownership prior to filing would increase the permitted exemption to $250,000. The issue is whether such transfer would be undone in bankruptcy because it is a fraudulent conveyance.

I am unaware of any court decisions which have addressed this question. On one hand, as both spouses live in the house joint ownership is expected. Also, such a transfer is not being made to a non-debtor in order to keep the property out of bankruptcy. However, the transfer looks like a fraudulent conveyance to the extent there is no consideration and is made to a family member. If the property was once in joint name before being titled individually, a return to joint ownership may be more easy to defend. I expect that a Chapter 7 trustee would challenge the transfer and the combined homestead exemption, but it is not clear how a court would rule.

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

Liability of Authorized Credit Card User

A common question from bankruptcy clients concerns liability for credit card debt of a spouse is who an authorized user of a credit card issued in the name of the other spouse filing bankruptcy. Clearly, when both spouses sign the credit card agreement they are each individually liable for all charges regardless of who made the purchase. The general rule is that a spouse is not liable for credit card debt if he or she is authorized to use a card but did not agree to accept liability by signing the credit card agreement. Nevertheless, some banks have gone after authorized users for credit card debt balances on cards issued in the name of spouse who file bankruptcy.

None of my bankruptcy clients have ever asked me to research this issue. I have heard that some banks do go after authorized users on the theory that whoever signs the credit card charge slip is liable for the purchase amount even if the credit card was not issued in their name. Even then, the user could make collection difficult by insisting the credit card produce original credit card charge slips and verify signatures. The user could also defend collection by taking the position that purchase were on behalf of the bankrupt cardholder. Because it is difficult for banks to actual establish liability for the purchaser, other than the named cardholder, banks usually do not pursue collection against people other than named cardholders who are party to the credit card agreement.

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