Blog
Law Offices of Chance M. McGhee

Call Today for a FREE Consultation

210-342-3400

Archive for the ‘asset Chapter 7 case’ tag

A Creditor’s Challenge to the Automatic Stay to Pursue a Lawsuit

February 21st, 2018 at 8:00 am

A creditor may ask the bankruptcy court to let another court finish a lawsuit about liability and/or the amount of damages. 

 

“Relief from the Automatic Stay”

Our last blog post was about the possibility of a creditor asking for “relief from the automatic stay.” The automatic stay refers to the immediate protection you receive from debt collection as soon as you file bankruptcy. (See Section 362 of the U.S. Bankruptcy Code about the “Automatic stay.”)

So, a creditor’s motion for “relief” from that protection refers to a creditor’s request to the bankruptcy court for permission to pursue a debt in spite of your bankruptcy filing. In certain circumstances a creditor may have legal grounds to ask for an exception to the automatic stay protection. (See Section 362(d) of the Bankruptcy Code about “relief from the stay.”)

Last time we focused on the most common situations in which creditors ask for “relief from the automatic stay.” That’s when a creditor wants to pursue the collateral securing the debt. For example, it wants to repossess your vehicle or foreclose on your home because you aren’t current on monthly payments. Once you file bankruptcy creditors can’t take such actions until asking for and getting “relief from stay” from bankruptcy court.

Relief for Creditor for Reasons Other than Pursuing Collateral

However, there are other reasons for creditors to ask for relief from stay. The automatic stay covers more than the protection of collateral from your creditors. It also stops most lawsuits against you to collect a debt. In most cases your bankruptcy filing will permanently stop that lawsuit. But sometimes, under limited circumstances, a creditor which has sued you may ask for bankruptcy court permission to finish that lawsuit.

 We cover two of these limited circumstances today (and the rest in our next blog post).

Reasons to Ask for Relief from Stay to Finish a Lawsuit

A creditor might ask to finish a lawsuit in order to determine:

  1. whether you are at all liable on a debt—liability
  2. if you are liable on a debt, the amount you owe—the damages

1. Determining Liability Outside of Bankruptcy Court

Someone or some business may think you owe something to it, but you dispute that you do. You don’t think you owe anything. You think you have no liability at all.

If this dispute about liability is already being addressed in a lawsuit when you file your bankruptcy case, sometimes it makes sense to finish determining liability in that lawsuit. Your bankruptcy filing would almost always stop that lawsuit. The creditor would have to get the bankruptcy court’s permission to continue the lawsuit to determine whether you were liable.

For example, you may dispute any liability on a large credit card debt run up by your ex-spouse without your knowledge. If the cred card company sues you to collect the debt, you may be able to establish in that lawsuit that you owe nothing on that debt. The creditor may believe that you are liable and wants to determine that through the lawsuit. It may file a motion for relief from stay to do so in spite of your bankruptcy filing. (It would more likely do so if it could get money out of your bankruptcy case. That could happen in an asset Chapter 7 case or in a Chapter 13 case paying unsecured debts.)

2. Determining the Amount of a Claim

You may instead be in a lawsuit in which you admit that you owe something but dispute the amount owed. The creditor may ask for relief from stay to finish the lawsuit in order to determine the amount you owe.

For example, you were in an accident in which you admit some liability but dispute the amount of damages. You admit that you were at least partially at fault but dispute the damages you caused and their dollar amounts. In this situation the creditor may ask the bankruptcy court for relief from stay to finish the pending lawsuit to determine the amount of damages for which you are liable.

As in the situation above, the creditor would not bother asking for relief from stay if the debt is simply going to get discharged (written off) with nothing paid to it no matter how large the debt. It’s only worth pursuing the matter if the creditor can anticipate getting paid something. Again, this would be much more likely in an asset Chapter 7 case or a Chapter 13 case paying general unsecured debts.

Will the Creditor Get Relief from the Stay?

In both of these situations, the bankruptcy court may or may not grant relief from stay to finish the lawsuit.  It mostly depends on which court could more efficiently finish resolving the dispute—the original court or the bankruptcy court. If the liability or damages dispute has come close to being litigated in the original court, the bankruptcy court may just let the first court finish the lawsuit. That’s also more likely if that court has more experience dealing with those kinds of cases than a bankruptcy court. That’s often the situation. But it a lawsuit has just started, and the dispute is one that the bankruptcy court is experienced in handling, it may not give relief to the creditor but instead resolve the liability or damages dispute itself.

 

Timing: Avoiding Very Troublesome “Preference” Payments

October 2nd, 2017 at 7:00 am

Sometimes in bankruptcy doing the honestly right thing can cause you major problems. Making preference payments is a good example of this. 


The Understandable Inclination to Pay a Favored Creditor

If you’re having financial problems and considering bankruptcy, you might feel compelled to first take care of a special debt. You may owe a relative or friend who is in real need of the money. You may feel deep and legitimate pressure to pay part or all of it in spite of your own financial problems. You may figure, accurately or not, that you won’t be allowed to pay this person after filing bankruptcy. Or for various reasons you may not want to involve this person in your bankruptcy case. You may not want to have him or her know about it. So you figure the best way to do that is to pay off or settle the debt beforehand.  

But your intentions—good or otherwise—could significantly backfire, if you don’t know the law and don’t get good advice.

The Dangerous, but Avoidable, “Preference” Payment

“Preference” payments are among the most frustrating situations in bankruptcy. They seldom happen but are a major headache when they do.

Because of the trouble they can cause, trouble that is often easy to avoid, “preferences” are worth understanding.

The Law on “Preferences”

So what are “preferences” and why are they a problem?

Bankruptcy law say that if during the 365 day-period BEFORE filing a bankruptcy case you pay a creditor more than you are paying at that time to your other creditors, then AFTER your bankruptcy is filed that favored creditor could be forced to surrender to your bankruptcy trustee the money that you had paid to this creditor earlier. (See Section 547 of the U.S. Bankruptcy Code on “Preferences.”)

In other words if you pay a special creditor during the year before filing bankruptcy, that person (or business) could be required to return that money.

The money would usually be returned not to you but to your bankruptcy trustee, to be re-distributed among your creditors. So instead of having a satisfied favored creditor, you would likely have a very unhappy one. You had wanted to fulfill your moral obligation to the creditor. Instead he or she would get a legal demand by your trustee to cough up the money you’d paid. Your friend/relative would have to scrape up the money you paid to him or her months earlier—very likely spent by then—to pay to the trustee.

After this would happen you may even feel morally compelled to pay that person yourself a second time. You might want to make up for the money the trustee took away from him or her.

The Point of “Preference” Law

What could possibly be the point of this 1-year “preference” rule? It is meant to promote one of the basic principles of bankruptcy law—legally equal treatment of creditors. This principle applies mostly DURING your bankruptcy case. However, to a limited extent the law also looks 1 year backwards from the time you and your bankruptcy lawyer file your case.  

So people in financial trouble are discouraged from playing favorites among their creditors for a year before filing bankruptcy. This is supposed to make the situation more financially fair to all the creditors.

One Scenario

Here’s an example to help make sense of this odd concept.

Imagine that you’ve owed your sister $3,000 for money she lent you so that you could pay your rent. You haven’t had the money to pay any of it back. She now really needs the money. Plus you really don’t want her or the rest of your family to know you’re filing bankruptcy. You’ve stopped paying other creditors for a while so you’ve scraped together the money to pay off this debt. You intend to pay it off and then file bankruptcy right after because you’ve recently been sued by a creditor. You know your paycheck is getting garnished in a few weeks if you don’t stop that by filing bankruptcy.

But here’s what would happen if you paid off your sister and then filed bankruptcy (within a year after).

A month or two after filing bankruptcy your bankruptcy trustee would very likely demand that your sister pay $3,000 to the trustee. If she didn’t pay, the trustee would likely sue her to make her pay. Once she did pay, that $3,000 would be divided among your creditors according to a set of priority rules. Your sister would be out $3,000. You may then feel obligated to pay her that, again. She (and probably your whole family) would know about your bankruptcy filing. Everybody would be unhappy.

It’s Usually an Avoidable Problem

This “preferences” mess can be avoided simply by not paying your favored creditors anything during the year before filing. This includes both money and anything else of value.

And if you do pay anything to such clients, hold off on filing bankruptcy for a year after.

That’s easier said than done when you have creditors suing or creating other collections problems. Your lawyer could likely help keep these creditors at bay. More broadly he or she would put together your best game plan for dealing with all of this.

 

Example of a Simple Chapter 7 “Asset Case”

June 21st, 2017 at 7:00 am

Chapter 7 “asset” cases may sound scary. They needn’t be. We walk you through a very straightforward example to demystify this.  

 

Asset and No-Asset Chapter 7 Cases

Our last blog post discussed the difference between a no-asset and asset Chapter 7 case. Simply put, in a no-asset case everything you own is covered and protected by available property exemptions. So your trustee takes nothing from you. In contrast, in an asset case, something you own is not covered by a property exemption. So the trustee takes it, sells (“liquidates”) it, and distributes the proceeds to your creditors.

We ended our last blog post with a short example of what happens in an asset case if you happen to owe certain kinds of debt that you’d still have to pay after bankruptcy, such as accrued child support or recent income taxes. The Chapter 7 trustee pays such special “priority” debts in full before paying anything on ordinary debts. That way most of your asset proceeds go to a debt that you have to pay anyway.

But what if you don’t have any such priority debts? What happens in an otherwise simple Chapter 7 case in which you to have an asset that the trustee gets and liquidates?

Our Simple Example

Assume someone named Hannah owes $80,000 in a combination of personal loans, credit cards, and medical bills. Her income qualifies her for a Chapter 7 case under the “means test” in her state with her family size. Under the property exemptions that the law provides to her, everything she owns is exempt except for one thing. She owns, free and clear, a sailboat with a fair market value of $8,000. (Such a boat may be exempt in some states, probably depending on what else she owns, but let’s assume it’s not exempt here.)

Hannah would partly like to keep the boat, because her kids enjoy sailing with her. But it is quite expensive to maintain, draining money she needs for much  more important expenses. So she doesn’t terribly mind losing the boat.

Keeping the Boat

Her bankruptcy lawyer tells Hannah she does have two possible ways to keep the boat. One is under Chapter 7 “straight bankruptcy” and another under Chapter 13 “adjustment of debts.”

She could likely keep the boat by essentially paying for the right to keep it, in a different way with these two options.

Chapter 7 Option for Keeping the Boat

In a Chapter 7 case, if she could come up with around $8,000 she could offer it to the trustee. The trustee would almost certainly accept the money instead of taking the boat. In fact the trustee would likely accept somewhat less because Hannah would be saving the trustee the costs involved in liquidating the boat. The trustee may even allow Hannah to pay off the boat over the course of several months. Then after receiving Hannah’s money, the trustee would distribute it out to her creditors.

Assuming that Hannah doesn’t have ready access to $8,000, either immediately or over the next several months, this is not a very practical option. And even if she could borrow or otherwise raise the money, she’d likely decide that that much effort wasn’t worthwhile. Again, she doesn’t really want the boat anymore.

Chapter 13 Option for Keeping the Boat

Chapter 13 makes hanging onto the boat easier. Hannah would likely have 3 to 5 years to make payments into a Chapter 13 payment plan. Those payments would reflect how much she could afford to pay, and would have to be enough over time to pay at least the $8,000 value of the boat.

So she’d have much more time to pay than under Chapter 7. But she’d be stuck in a bankruptcy case for years, simply to be able to keep something she no longer thinks is wise to keep.

The Best Option Here—the Asset Chapter 7 Case

Hannah decides that simply giving the boat to the Chapter 7 trustee would be the best for her here.

So, with the help of her lawyer she files a Chapter 7 case. A few weeks later she signs over the boat to her assigned trustee. The trustee sells the boat, and after expenses (for the boat broker’s commission, storage fees and such), has a net amount of $7,000.

The trustee is entitled to a fee. It’s generally calculated to be no more than 25% of the first $5,000 distributed, plus 10% of the next $45,000. (See Section 326(a) of the U.S. Bankruptcy Code.) That amounts to a $1,950 fee here, which would come out of the $7,000.

That leaves $5,050 for the creditors. Since Hannah owes no “priority debts,” the $5,050 is divided pro rata among the $80,000 of debts. This means that her creditors would all receive a little more than 6 cents on the dollar.

Although Hannah is losing the boat to her creditors, under her circumstances this is her best option. She gets rid of something that she doesn’t need, finishes her case in a matter of a few months, and gets a fresh financial start by being debt-free.

 

A Chapter 7 “Asset Case”

June 19th, 2017 at 7:00 am

Most Chapter 7 cases are “no-asset” ones. So, what’s an “asset case,” and is it good or bad for you?  

 

The More Common No-Asset Case

The Chapter 7 bankruptcy option is sometimes confusingly called “liquidation” bankruptcy. That implies that something you own gets “liquidated”—sold.  But in most consumer Chapter 7 cases that’s not what happens.

Under Chapter 7 you get a discharge (legal write-off) of most or all of your debts you want to discharged. In return only those things that you own, IF ANY, that do NOT fit within a set of property exemptions must be turned over to your bankruptcy trustee, who then sells them and distributes the proceeds to your creditors.

The reality is that in most Chapter 7 cases everything DOES fit within the set of applicable property exemptions.  So most consumer debtors do NOT turn ANYTHING over to the trustee, and get to keep everything.  Nothing is actually “liquidated.”  Because the trustee takes no assets for distribution to the creditors, this is called a “no asset” case.

Asset Case

So naturally, if you file a Chapter 7 case and own some assets which do NOT fit within the applicable exemption, that’s called an “asset case.” The trustee has assets to take and sell, and distributes their proceeds to creditors.

Reasons Non-Exempt Assets May Not Result in an Asset Case

Just because you have assets that do not fit the applicable property exemptions does not necessarily mean you have an asset case. The trustee is not necessarily obligated to take non-exempt assets, for the following reasons: 

1. The value of the non-exempt assets may be too small to justify the effort. The trustee has to go through quite a few steps in collecting and distributing assets in a Chapter 7 case. If the anticipated amount of collected assets is small, the effort going through all the steps may not be worthwhile.  Talk with your bankruptcy lawyer about what your trustee may consider “too small,” because that varies with different trustees and on your circumstances.

2. The cost and risk involved in collecting or liquidating the asset(s) may not be worthwhile.  You may have an asset in the form of a claim against somebody which may be worth some money. But it may cost a lot in attorney fees to pursue it, and there may not be a positive result.  The trustee may decide that the odds of winning the lawsuit or claim do not justify paying the attorney fees.  

3. An asset can be “burdensome” and not worth collecting for a various practical reasons.  Examples include real estate tainted by hazardous waste, and a pedigree show dog that has a serious temperament problem.

Not Want an “Asset Case”?

Don’t you want to avoid having an “asset case,” avoid having the trustee take something from you?

Sure, in most cases you want to keep everything you own and not have it go to your creditors. But, sometimes you don’t mind giving up something, especially if doing so is the best alternative for you.  

You may not mind giving up an asset if you don’t need it any more. You especially many not mind giving up the asset if the trustee pays the proceeds to creditors you want to be paid anyway.

Paying Your Important Creditor(s) Through Chapter 7 Liquidation

Let’s say you’re a small business owner with leftover business assets after you’ve shut down the business. (Assume these asset are not “tools of your trade” you need for earning your future living). You don’t need or want the business assets. You’d rather give the trustee the headache of divvying them up among the creditors. Surrendering those former business assets to the trustee may well be much better than going through a 3-to-5 year Chapter 13 payment plan just to keep those assets. 

How could the proceeds from those assets possibly go to pay creditors you want to be paid?  This can happen because of the priority rules which determine which debts get paid first. Those priority rules yield results that are often consistent with your own priorities.

For example, the trustee pays any accrued child or spousal support, some tax obligations, and various other categories of “priority” debts in full before paying anything to the conventional “general unsecured” creditors. These special debts are often the ones you want to pay, because they are often not discharged in bankruptcy. So you are simply using the law’s priority rules to your advantage.

Easier Said Than Done

To be clear, things have to fall into place correctly for this to happen. A number of considerations have to be met in order for your assets to flow through a Chapter 7 trustee to the debts you want or need to be paid.

The point is that there are circumstances in which a Chapter 7 “asset case” is not such a bad thing. Indeed it can be your best alternative.

 

Chapter 7 Trustee’s Abandonment of Property

June 16th, 2017 at 7:00 am

Just because you own something that’s not exempt doesn’t always mean that the Chapter 7 trustee will take it. The trustee could abandon it. 

 

Our last blog post discussed factors that a trustee would consider in deciding whether to liquidate one of your assets. In most consumer Chapter 7 cases the trustee liquidates nothing because everything the debtor owns is “exempt,” or protected.  That’s called a “no asset” case because the trustee does not claim anything for the “bankruptcy estate.”

The trustee can get interested in something a debtor owns only if it is not exempt—not protected.  But even when something isn’t exempt, the trustee may still decide it’s not worth liquidating. If that’s the trustee’s decision, he or she could then “abandon” the property.                

Reasons to Abandon

The United States Bankruptcy Code says that

the trustee may abandon any property of the [bankruptcy] estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.

See Section 554(a) of the Bankruptcy Code.

The Chapter 7 trustee’s main job is to “collect and reduce to money the property of the estate” (to the extent the property is not exempt). Section 704(a)(1). After the trustee liquidates any non-exempt property, he or she distributes that money to the creditors.

The point is to pay creditors a part of the debts owed (or, rarely, pay those in full). So it makes sense for the trustee to not have to mess with property that won’t help in that. It makes sense for the trustee to abandon property that is either “burdensome” or “of inconsequential value and benefit.”

“Burdensome”

“Burdensome” essentially means more trouble than it’s worth. An asset can be burdensome by being a liability—for example, real estate that has a severe hazardous waste problem. And it can be burdensome by costing more to liquidate than the asset is worth—for example, a modest boat worth $1,000 but which is in such of a remote location that it would cost more than that to retrieve, market, and sell it. And the asset could be both a potential liability and cost too much to liquidate. An example would be a questionable debt owed to the debtor, which would take attorney and court fees to collect, and may also result in counterclaims against the trustee.

“Of Inconsequential Value and Benefit”

A trustee has to consider whether something is worth so little that it’s not worth the trouble to collect and sell it. The usual considerations come into play about accounting for liquidation costs in arriving at the net cash proceeds.

But there’s another overarching consideration. The net cash proceeds need to be large enough to justify the trustee’s efforts involved in an asset case. Trustees get paid a maximum of 25% of the first $5,000 collected and 10% of the next $45,000. There is more to administering an asset-distribution case than you might think. Many trustees won’t bother chasing even $1,000 net cash proceeds because the $250 fee would not be worth all their trouble administering the case. Talk with your bankruptcy lawyer to find out your local trustees’ practices. At what threshold dollar amount do your panel of trustees consider that an asset is beyond “inconsequential value”?

Deemed Abandoned

A Chapter 7 trustee can do a formal abandonment procedure through a motion to the bankruptcy court. Otherwise, everything listed on your bankruptcy asset schedules “at the time of the closing of a case is abandoned to the debtor.” Section 554(c).

Practically speaking, trustees usually don’t bother to do a formal abandonment unless they want to quickly avoid the risk of liability from a detrimental asset. Most consumer no asset cases are closed within about 100 days after filing. So at that point all your assets are deemed to be abandoned by the trustee to you.

 

A “No Asset” Chapter 7 Case

June 12th, 2017 at 7:00 am

Most individual consumer Chapter 7 cases are “no asset” ones. This means that the Chapter 7 trustee doesn’t liquidate any debtor assets.

 

Chapter 7 Is a Liquidation Form of Bankruptcy

When think “liquidation,” this is what you may come to mind. A business decides to close down and files a Chapter 7 “liquidation” bankruptcy. A bankruptcy trustee gathers and sells all of the business’ assets and pays its creditors as much as it can out of the proceeds.

When you as an individual file under Chapter 7 it’s still a so-called “liquidation” bankruptcy, but it’s usually completely different. Nothing of yours is liquated by your Chapter 7 trustee. The reason is that, unlike a corporation, you are entitled to many property exemptions. These are provisions in the law which protect what you own from your creditors. They protect your property from your Chapter 7 trustee, who acts on behalf of your creditors. Usually everything you own fits within the exemptions that apply to you, protecting everything.

That is called ano asset Chapter 7 case.” The trustee does not liquidate anything.

But in some Chapter 7 cases, everything is not exempt. This is called an “asset Chapter 7 case.”

In this blog post we’ll look at some practical aspects of “no asset” cases.

Anticipating a “No Asset Chapter 7 Case”

After deciding with your bankruptcy lawyer to file under Chapter 7, together you prepare your property and exemption schedules. See Schedule A/B and Schedule C.

In less than half the states, you will have the option of using your state’s property exemptions or a set of federal ones. The federal ones are in the Bankruptcy Code. (See Section 522(d).) In the rest of the states you must use the exemptions provided by the state.

In many situations it will be clear that everything you own fits within the exemptions available to you. Everything fits reasonably neatly into exemption categories. For example, you own a vehicle, and there is an available vehicle exemption. And everything you own is worth no more than the maximum value allowed. For example, your vehicle is worth $4,500 and the exemption maximum is $5,000.  

So your lawyer informs you that based on the information you’ve provided, you should have a “no asset case.” The trustee is not likely to decide that anything you own is not exempt and therefore considering taking and liquidating.

The “Meeting of Creditors”

Then about a month after filing your case, you and your lawyer attend a so-called “meeting of creditors.” Although your creditors are invited, usually none, or maybe only one or two, attend. The meeting is presided over by the assigned Chapter 7 trustee. Usually the main thing that happens is that the trustee verifies that everything you own is exempt and protected. The trustee asks you a few questions under oath verifying the accuracy of what you put on your asset schedules.

Then, depending on the personal practices of the individual trustee, he or she may announce towards the end of the meeting that it’s a “no asset case.” If you do not hear that announcement, your lawyer will likely tell you right after the meeting that that’s effectively the situation. That’s because your schedules show that everything you own is exempt, and the trustee is not asking for further information.

The Trustee’s “No-Asset Report”

Whether or not the trustee announces it at the hearing, if the trustee determines that the case is a no asset case he or she files a “no-asset/no-distribution report.” Here’s a sample of that simple report from the Handbook for Chapter 7 Trustees. At the heart of it is the following statement: “I… report that… I have made a diligent inquiry… and that there is no property available for distribution from the estate over and above that exempted by law.”

 

Next time we’ll get into what happens when things don’t go quite as smoothly as this.

 

Proceeds, Rents, or Profits as “Property of the Estate”

June 9th, 2017 at 7:00 am

Assets acquired after filing under Chapter 7, such as wages, can’t be reached by the trustee. But watch out for proceeds, rents and profits. 

 

After-Acquired Property Is USUALLY Not Property of the Estate

Your filing of a Chapter 7 “straight bankruptcy” case creates a bright red line of timing. What you own at that moment of filing is potentially accessible to the Chapter 7 trustee to pay your creditors. It’s “property of the bankruptcy estate.” What you acquire later is not.

In most consumer Chapter 7 cases the trustee actually does not take and liquidate anything out of the “bankruptcy estate.” That’s because in most such cases everything in the estate is exempt—covered by the available property exemptions.

But it’s still important to know what is included in the bankruptcy estate and what is not. That’s especially true if you don’t realize that something is, and then you don’t have an exemption that protects it. As a result something that you expected to be able to keep could be taken from you.

The purpose of this blog post is to prevent this bad surprise for you when it comes to “proceeds, product, offspring, rents, [and] profits.”

The Exception

This exception to the bright timing line is pretty simple and even commonsensical. If you own something at the moment of filing, that’s property of the bankruptcy estate. The fruit of that property is also property of the estate.

Here’s how the Bankruptcy Code puts it. The bankruptcy estate includes “[p]roceeds, product, offspring, rents, or profits of or from property of the estate.” Section 541(a)(6).

The practical ways that problems arise include if:

  • an asset is exempt but its proceeds, product, etc. is not
  • an item of property is not exempt so you intended to surrender it to the trustee but expected to keep some proceeds
  • you are eventually surrendering an asset to a creditor, it little or no equity so the trustee is not interested in it, but you expected to keep its proceeds before your surrender to the creditor

The best way so explain these three are by example.

1) Exempt Asset but Proceeds Are Not

Your family dog has a good pedigree and is worth a fair amount, but is exempt. You file Chapter 7 bankruptcy when she is carrying a litter of pups. A month later 5 puppies are born, each healthy and with a fair market value of $1,000. Those puppies are property of the Chapter 7 estate as “offspring” of your dog (who herself is property of the estate).

In your state you may or may not have a “wild-card” or some other exemption that would apply to that $5,000 worth of “offspring” of the bankruptcy estate. If not the trustee could take and sell those puppies and pay the proceeds to your creditors.

2) Non-Exempt Asset’s Proceeds

You own a nice boat which is not protected by any exemption. You don’t want the boat anyway because it costs too much to maintain, so you’ll be surrendering it to the trustee. But for the last several months you’ve been renting it out to a friend for $500 per month, $200 of which covered the moorage fee in your name. You thought you’d get another rental payment or two after filing and before turning the boat over to the trustee.

But any $500 rent payments you receive after the date of filing are property of the Chapter 7 estate. On top of that the after-filing mooring fee would be a debt likely not covered by your bankruptcy case. So besides the trustee taking your renter’s $500 (or $1,000 for two months), you’d still be liable for the mooring fees. It’s a doubly bad situation.

3) Proceeds of No-Equity Property Before Surrender to Creditor

You own a rental home that’s ended up being a bad investment. It’s virtually underwater—worth about what you owe on it, and costing you more than you’re making on it. So you are filing bankruptcy and surrendering the home to its mortgage company. But you have a renter paying $1,250 monthly, and you figure you can keep a couple months of rent before surrendering the home to the mortgage holder. You’re hoping to get even more months because the bankruptcy filing may buy you more time before a foreclosure.  

But that rental home is property of the estate, even if it has negligible equity. So those rental payments are property of the estate as well, even though they are arriving after that otherwise bright red line of the date of your filing. You would have to surrender the rent payments to the Chapter 7 trustee, except to the extent there would be an exemption covering any of it.

Why You Need an Experienced Bankruptcy Lawyer

This blog post today is a lesson in why you should not file a bankruptcy without a lawyer. It’s also a lesson in why you shouldn’t file without an experienced one. Bankruptcy law is quite complex. Some of the most basic rules may seem pretty straightforward. But then there are the exceptions. And there are countless twists and turns that may or may not apply to your case. It makes sense to rely on someone who has spent years doing nothing but working those twists and turns.

 

“Property of the Estate” and Marital Property Division

June 7th, 2017 at 7:00 am

The 180-day rule also applies to marital property division, whether by agreement or court decree. 

 

Our last half-dozen blog posts have been about what’s in the “property of the estate” of your Chapter 7 case. This matters because you must protect whatever is “property of the estate” by a property exemption or you risk losing it.

Generally, everything you own at the moment you file your Chapter 7 case is “property of the estate.” The date of filing is usually crucial in determining what is and what is not. But as we’ve seen in the last three blog posts, if you come into property a few very special ways during the 180 days AFTER filing, that property is also “property of the estate.” We’ve covered property received through an inheritance, life insurance proceeds, and other death benefits. The idea is that if you come into money or property that soon after filing bankruptcy, the creditors have rights to it.

Property from Divorce Property Settlements and Decrees

Property that you receive through divorce is one last special way of getting property to which the 180-day rule applies.

The U.S. Bankruptcy Code says that “property of the estate includes “an interest in property” which “a debtor acquires or becomes entitled to acquire” within 180 days after filing bankruptcy “as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree.” Section 541(a)(5)(B) of the Bankruptcy Code.

In other words, if within the 180-day period you get rights to property through a divorce property settlement or decree, it’s “property of the estate.” Whatever you get is treated as if it was yours at the moment you filed your Chapter 7 case.  

An Example

Let’s assume you filed bankruptcy not long after filing for divorce. You and your ex-spouse had already agreed that you would each just get what you’d already split up. Your vehicle, household goods, and other personal effects all fit within the available property exemptions.

But there’s a problem. You received the family home in the divorce decree as expected. You didn’t think there was any problem with that. Assume you are allowed a homestead exemption of $50,000. (This varies greatly depending on your state.) You owe $150,000 on a $230,000 home. At the time you filed your case both you and your spouse owned the house. That allowed you to claim only half of the equity as yours, or $40,000 of the $80,000 total equity. This $40,000 fit within the $50,000 homestead exemption, so it seemed to be protected.

But when the divorce decree was entered into within 180 days of your bankruptcy filing, you became the sole owner. The home is then treated as if were all yours as of the filing date.

So now all $80,000 of equity is treated as yours, with the $50,000 homestead exemption insufficient to protect it. Your home would be in serious jeopardy.

Conclusion

Be sure to tell your bankruptcy lawyer if you are in the midst of any divorce-related negotiations or dissolution proceeding. In fact, in some states this might even possibly apply to unmarried cohabitating couple break-ups. If you have ANY situation in which you may receive something because of the end of a marriage or relationship, discuss it thoroughly with your lawyer.

 

“Property of the Estate” May Include Life Insurance Proceeds

June 2nd, 2017 at 7:00 am

The 180-day rule applies to life insurance proceeds in a Chapter 7 case. But life insurance proceeds are often exempt, or protected. 

 

Last time, we explained the 180-day rule about inheritances. If within 180 days after you file bankruptcy you “acquire or become entitled to acquire” an inheritance, then the property being inherited is “property of your bankruptcy estate.” It’s counted as if it was your property at the time you filed, even though it wasn’t.  (See Section 541(a)(5)(A) of the Bankruptcy Code.)

That means to whatever extent the inherited property isn’t covered by a property exemption, or protected some other way, the Chapter 7 trustee can take and liquidate it to pay your creditors.

That 180-day rule also applies to life insurance proceeds, our topic today. (See Section 541(a)(5)(C) of the Bankruptcy Code.)

“Property Exemptions”

Most—but by no means all—people who file Chapter 7 “straight bankruptcy” can keep everything they own. That’s because everything they own fits within “property exemptions. These are protected categories of property, usually—but not always—with specific maximum value amounts.

For example, you may have available a vehicle exemption of $5,000. This allows you to keep a vehicle if it is worth no more than that. Or if you owe on the vehicle, you can have up to that much in equity (its value minus the debt).

Property exemptions can get complicated. There are often “wildcard’ exemptions that you can use on anything. Exemptions are often double the usual amount if you file a joint case with your spouse—but not necessarily. It’s not always clear what property fits within a particular exemption. Coming up with the value of your property isn’t always easy. Also, each state has its own set of exemptions, and these can be wildly different, even in adjoining states. In 19 states you can choose between that state’s exemptions or a set of federal ones. In the rest you must use the state’s exemptions. And you have to live in a state for a certain length of time or else you have to use what’s available in a prior state.

“Property of the Bankruptcy Estate” and “Property Exemptions”

It’s actually a two-step process to determine whether you get to keep everything you own.

The first step is whether it is “property of the bankruptcy estate.” If something is not “property of the estate,” it doesn’t come under bankruptcy jurisdiction. You don’t need to exempt it. If something is “property of the estate” you need to fit it within an available exemption. Otherwise the Chapter 7 trustee could take it, liquidate it, and pay the proceeds to your creditors.

Then the second step is whether something that IS “property of the estate” is protected by a property exemption.

Are Life Insurance Proceeds “Property of the Estate”?

What if someone dies before you file a Chapter 7 case leaving you money in life insurance proceeds? To the extent any of that money is still around, it’s “property of the estate.” (Be sure to talk with a bankruptcy lawyer before trying to dispose of such money before filing bankruptcy. That can be dangerous if done without competent legal advice.)

If you haven’t received the insurance proceeds at the time of filing, it would all be “property of the estate.” That’s because you are legally entitled to it even if it hasn’t arrived yet.

What if someone dies seven months after you file your Chapter 7 case, leaving life insurance money? The life insurance money is NOT property of the estate. Why? Because you did not “acquire or become entitled to acquire” the life insurance benefits “within 180 days after” filing bankruptcy.

What if someone dies within 180 days after you file your Chapter 7 case? As just implied, the life insurance proceeds would be “property of the estate.”

Are Life Insurance Proceeds Covered by a Property Exemption?

IF your life insurance proceeds ARE property of your bankruptcy estate, they may still be exempt. It depends on your state. It often also depends on your relationship with the decedent. The amount of proceeds may also matter.

For example, if you qualify to use the federal exemptions you can exempt funds from a life insurance policy that insured the life of someone of who you were a dependent so long as the funds are “reasonably necessary” for your support and that of any of your dependents.

In contrast, a number of states exempt unlimited amounts of life insurance proceeds to a spouse or dependent.

So, whether the life insurance coming to you are exempt really depends on which exemption laws apply to you.

 

“Property of the Estate” Includes an Inheritance

May 31st, 2017 at 7:00 am

If you are expecting an inheritance, or even if you are not, the special rules about them are worth your attention to prevent bad surprises. 


Most people thinking about filing bankruptcy aren’t expecting an inheritance.

But if you are, there are some very important timing rules that can affect whether and when you’ll file bankruptcy.

And even if you are not expecting an inheritance, these rules are helpful to know in case you unexpectedly do receive one.

Fixation on Property Owned at the Moment of Filing Bankruptcy

When we introduced “property of the estate” a week ago we emphasized that it’s comprised of everything you own at the “commencement of the case.”

The timing is crucial. Usually any property you acquire in the days and months after filing a Chapter 7 case is not “property of the estate.” It doesn’t fall within the jurisdiction of the bankruptcy court or the reach of the liquidating Chapter 7 trustee. You don’t have to protect that property with exemptions. It’s simply yours.

This feature is an important part of the “fresh financial start” that Chapter 7 bankruptcy provides. After that moment in time when you file your case you’re generally free to earn and acquire income and assets. They are beyond the reach of your creditors.

Inheritances are an exception to this.

The 180-Days-after-Filing Inheritance Rule

If within 180 days after you file bankruptcy you “acquire or become entitled to acquire” an inheritance, then the property being inherited is counted as if it was your property at the time you filed.  (See Section 541(a)(5)(A) of the Bankruptcy Code.)

In other words, whatever you inherit within that 180 days becomes “property of your Chapter 7 estate.” To whatever extent the inherited property isn’t exempt or protected some other way, the Chapter 7 trustee can take and liquidate it to pay your creditors.

Includes Interests in Property Acquired by “Bequest, Devise, or Inheritance”

The term “inheritance” specifically means property received through state laws distributing the property of a decedent who did not leave a will. The 180-day rule covers this.

But it also covers property acquired through a will. A “bequest” and a “devise” are provisions in a will giving away the personal property and real estate, respectively. These are also covered by the 180-day rule.

Ignorance is No Defense

It does not matter that you did not expect to receive anything through someone’s death. It doesn’t matter that you don’t even know that the person leaving you something has died. Any such property is yours for bankruptcy purposes regardless of your lack of knowledge about them.

Conclusion

So before filing bankruptcy, think about who you might possibly inherit from. Consider the likelihood that the person could die within the following six months. Talk with your bankruptcy lawyer about it. There may be some favorable ways of dealing with this situation that would protect some or all of that inheritance for you, if you inform your lawyer in advance.

 

Call today for a FREE Consultation

210-342-3400

Facebook Blog
Back to Top Back to Top