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By Jennifer Pahlka from Oakland, CA, sfo (LOL Just divorced. And no, that's not my car.) [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia CommonsA debtor moved to dismiss her Chapter 7 bankruptcy case after the trustee sought to use half of a $5,000 monthly payment she received from her ex-spouse to pay creditors. The trustee claimed that half of the monthly payment, which was the debtor’s only reported source of income, was actually an asset under the terms of the divorce decree and was therefore part of the bankruptcy estate. The bankruptcy court granted the motion and dismissed the case. The Bankruptcy Appellate Panel (BAP) reversed, finding that dismissal of the case would prejudice the creditors. In re Grossman, No. NV-13-1325, memorandum (BAP 9th Cir., Feb. 4, 2014) (PDF file).

The central issue for the debtor was whether $2,500 of the $5,000 payment she received every month from her former spouse was spousal maintenance, which is an exempt form of income under bankruptcy law, or part of her share of the marital estate, which is a non-exempt asset. The settlement agreement between the debtor and her former spouse stated that she was entitled to $390,000 from the former spouse. He paid her $30,000 upon signing the agreement and began making monthly payments of $2,500 on February 1, 2005. This is known as an “equalization payment.” The full amount should be paid by 2017. He sends her an additional $2,500 per month, which all parties in the bankruptcy agree is spousal maintenance.

The debtor filed a Chapter 7 petition in April 2013. She did not include the equalization payment in the Schedule B list of personal property, nor did she include a copy of her divorce decree. She reported $5,000 per month in spousal maintenance income in the Statement of Financial Affairs. After receiving a copy of the divorce decree, the trustee claimed that the equalization payment was an asset of the bankruptcy estate that could be sold to pay creditors. Continue reading

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By Valugi (Own work) [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia CommonsAn article published earlier this year in The Week tells the story of a professional debt counselor who filed for bankruptcy. His account is notable, as he candidly admits, in part because it seems odd for someone who makes a living advising other people about their debt to find himself unable to pay his own debts. The moral of the story, to the extent that any real-life story has a “moral,” is that financial difficulties can happen to anyone. It is not always the result of some major crisis and, despite some lingering negative perceptions in our culture, it is not necessarily brought on by laziness or irresponsibility. Someone might do everything exactly right, but things still don’t always work out. This person’s story offers a glimpse of how filing for bankruptcy is not a cause for shame or an admission of failure, but a useful tool that allows people to get a fresh start.

According to Dave Landry’s piece in The Week, he and his wife married just after graduating college, when they had $40,000 in student loan debt between them. He admits that they lived beyond their means for a few years, accumulating $20,000 in credit card debt on top of the student loans. The birth of their first child caused them to cease their “jet-setting ways,” but they needed a bigger place to live. After the birth of their second child, they upgraded to a larger house, one that Landry admits was bigger than they absolutely needed. This occurred around the time of the recession of 2008, resulting in a $100,000 loss on the sale of their first house.

With the benefit of hindsight, it might seem easy to look at this story and identify mistakes. Life never works like that in real time, though, and much like doctors who neglect their own health, a debt counselor can overlook important issues. People grow accustomed to a certain lifestyle and may not recognize changing circumstances until they have already gone deeper into debt. “A certain lifestyle” does not even have to mean extravagance. It might simply mean taking vacations every year, or eating out several times a week, or any other activities or expenses that push the boundaries of their income. Continue reading

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Ron's Log [CC BY-ND 3.0 (http://creativecommons.org/licenses/by-nd/3.0/)], via ipernityThe city of San Bernardino, California is in the process of preparing a bankruptcy plan in its ongoing bankruptcy case. While a Chapter 9 case, applied specifically to municipalities, might have some superficial similarities to an individual’s Chapter 13 bankruptcy case, cities and towns typically have issues that differ from both personal and business bankruptcy cases. The city is currently considering removing its ban on medical marijuana dispensaries, which would provide new sources of tax revenue. This is legal for cities and counties under California law, but it still conflicts with federal drug laws. In personal bankruptcy, individual debtors may be able to find a higher-paying job, take additional jobs to supplement their income, or go back to school to improve their job prospects. A debtor risks criminal penalties by disclosing income derived from illegal activity in a bankruptcy case, but he or she also risks revocation of the bankruptcy discharge if he or she fails to disclose that income.

San Bernardino filed for Chapter 9 bankruptcy in 2012, and it is still working on its exit plan. The city attorney proposed medical marijuana dispensaries in July 2014 as a means of increasing revenue, and the matter went to the full City Council in mid-September. Voters in California passed Proposition 215 in 1996, which amended the state Health and Safety Code to exclude individuals from state drug laws if they possess small amounts of marijuana with a valid doctor’s prescription. Senate Bill 420, enacted in 2003, further defined the scope of the program and created a system of identification cards for medical marijuana patients.

A 2009 California Supreme Court ruling required all of the state’s counties to participate in the program. Cities, however, are not obligated to allow dispensaries to operate within their jurisdictions. Oakland became the first city to tax marijuana sales in 2009, and others have followed. San Bernardino’s city attorney cited Palm Springs, which has about one-fifth the population of San Bernardino but brings in about $500,000 per year from its ten-percent marijuana tax. Continue reading

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J.M. Gandy (Uploaded by User:Merchbow) [Public domain], via Wikimedia CommonsA bankruptcy court dismissed adversary proceedings brought in a Chapter 13 case, in which the debtors sought to strip off junior liens held by the U.S. government for loans issued through the Small Business Administration (SBA). In re Brisco, 486 B.R. 422 (Bankr. N.D. Ill. 2013). The SBA had junior liens on two properties owned by the debtors:  their residence and a rental property. The SBA did not file proofs of claim for either lien by the deadline established by the Federal Rules of Bankruptcy Procedure (FRBP), and the court held that this prevented it from valuing the SBA’s liens as requested by the debtors. The debtors objected, arguing that the SBA’s failure to file proofs of claim apparently shielded their liens from avoidance, but the court noted that the Bankruptcy Code allows a debtor to file a proof of claim on a creditor’s behalf.

The debtors owned two properties: their residence, which was appraised at $135,000 and had a first-priority lien held by JPMorgan with a secured claim of $161,064.57, and a rental property appraised at $100,000, with a first-priority lien and secured claim by JPMorgan of $213,829. The SBA had junior liens on both properties and secured claims of $25,800 and $25,700, respectively. The court entered a judgment reducing the amount of JPMorgan’s secured claim on the rental property to its value of $100,000, with the remaining $113,829 becoming an unsecured claim under 11 U.S.C. § 506(a).

In two adversary proceedings brought against the United States, the debtors asked the court to rule that the SBA’s liens were wholly unsecured under § 506(a), and to strip the liens off the two properties under 11 U.S.C. §§ 506(d) and 1322(b)(2). The United States moved to dismiss for failing to state claims on which the court could grant relief, in large part because of the absence of proofs of claim. Secured creditors are not required to file a proof of claim, but if they choose to do so, the deadline for a governmental unit is set by FRBP 3002(c)(1). If the creditor does not file a proof of claim, the debtor may do so for them under 11 U.S.C. § 501(c). Continue reading

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The automatic stay in a bankruptcy proceeding is intended to freeze the bankruptcy estate at the moment the debtor files a petition in order to allow the bankruptcy trustee to deal with the estate’s property as efficiently as possible. By Kurtis Garbutt (http://www.flickr.com/photos/kjgarbutt/15420116119) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia CommonsFederal law excludes some proceedings and obligations from the automatic stay, however, for a variety of reasons. If a debtor is obligated to pay spousal maintenance or child support, or is involved in a legal proceeding in which those are at issue when a bankruptcy petition is filed, the automatic stay could negatively affect people who rely on the debtor for support. The automatic stay therefore does not apply to spousal maintenance and child support obligations. A divorce case usually involves more than just maintenance and support, however, so it can be difficult for bankruptcy courts to determine which parts of an order are subject to the automatic stay. A California district court recently addressed this issue in a dispute between a debtor and his soon-to-be ex-wife. In re Cohen, No. 2:14-cv-08939, civ. minutes (C.D. Cal., Oct. 5, 2015).

The Bankruptcy Code allows an exception to the automatic stay with regard to state court proceedings “for the establishment or modification of an order for domestic support obligations.” 11 U.S.C. § 362(b)(2)(A)(ii). Congress added this provision specifically to protect spouses, ex-spouses, and children of debtors from losing needed support during a bankruptcy proceeding. Bankruptcy courts also have rather wide discretion to determine whether or not a particular obligation in a divorce proceeding is a “domestic support obligation.” Federal bankruptcy law, rather than state family law, guides the court’s determination. Cohen at 8. As a result, a bankruptcy court may conclude that an agreement or order is not covered by the automatic stay under § 362(b)(2)(A)(ii), even if it does not specifically provide for spousal maintenance or child support, if the court concludes that a recipient needs support. Id.

The debtor’s wife (the “Wife”) filed a petition for divorce in Los Angeles County Superior Court in October 2008. The court signed and entered an agreed order (the “Order”) in March 2012, ordering the debtor (the “Husband”) to make monthly spousal and child support payments. The Husband filed for bankruptcy in June 2013, and the automatic stay halted many aspects of the divorce proceeding, including the division of property and the divorce itself. The parties agreed that most marital assets became the property of the bankruptcy estate.

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By Broderick, Thomas [CC0], via Wikimedia CommonsThe moment a debtor files a bankruptcy petition, the automatic stay takes effect. ‘Access’ or ‘use’ to the automatic stay is one of the primary benefits and reasons a person would consider filing a bankruptcy, whether via Chapter 7 or a Chapter 13. It basically provides an ‘umbrella of protection’ on all of a Debtor’s assets. This means that no party or creditor can repossess or foreclose on such assets once the bankruptcy has been filed. Bankruptcy courts can lift the automatic stay upon the motion of a creditor or other party-in-interest, if/where such creditor is able to convince the court to do so. A California district court recently ruled on a creditor’s motion to lift the stay with regard to ongoing litigation in state court. The court considered 12 factors established by case law to determine whether to lift the stay. In re Roger, No. 5:14-cv-02515, civ. minutes (C.D. Cal., Oct. 13, 2015).

A bankruptcy court, upon a motion by a party-in-interest, notice, and a hearing, can lift the automatic stay “for cause,” which gives the court very broad authority. 11 U.S.C. § 362(d)(1). Bankruptcy courts in the Los Angeles area have adopted a set of 12 factors to consider, known as the Curtis factors after In re Curtis, 40 B.R. 795, 799-800 (Bankr. D. Utah 1984). See also In re Plumberex Specialty Products, Inc., 311 B.R. 551, 560 (Bankr. C.D. Cal. 2004). A bankruptcy court must evaluate the impact on the bankruptcy estate, and the bankruptcy proceeding itself, of whatever action the party requesting relief from the automatic stay wants to take.

The court’s decision in the Roger case involved a creditor’s appeal of the bankruptcy court’s denial of its motion to lift the automatic stay. The creditor had a pending lawsuit against the debtor and others in state court, involving two loans, their associated security agreements, and several claims that collateral attached to the loans belonged to various trusts.

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By Makaristos (Own work) [Public domain], via Wikimedia CommonsThe U.S. Constitution gives the federal government authority over bankruptcy, and bankruptcy cases proceed in the federal court system based on federal statutes, regulations, and rules. Bankruptcy courts frequently have to deal with state-law issues, however. This is known as “permissive abstention.” Federal law allows bankruptcy courts to abstain from hearing state-law matters for various reasons. A creditor in a Los Angeles bankruptcy proceeding moved for the bankruptcy court to abstain from hearing issues involved in a lawsuit pending in state court. The bankruptcy court denied the motion, but the district court reversed this order after reviewing the factors courts should consider in a motion to abstain. In re Roger, No. 5:15-cv-00087, order (C.D. Cal., Nov. 24, 2015).

U.S. district courts have jurisdiction over bankruptcy cases, but they are permitted to refer these cases to bankruptcy judges. 28 U.S.C. § 157(a). Bankruptcy courts operate as specialized units of the district courts, and they are authorized to hear most matters arising under Title 11 of the U.S. Code. The permissive abstention statute allows district courts, and by extension bankruptcy courts, to abstain from hearing certain matters if it would be “in the interest of justice” or “in the interest of comity with State courts,” or if it would support “respect for State law.” 28 U.S.C. § 1334(c)(1). The Ninth Circuit has identified 12 factors courts should consider when ruling on permissive abstention, known as the Tucson Estates factors after In re Tucson Estates, 912 F.2d 1162, 1166 (9th Cir. 1990).

The motion to abstain in the Roger case involved a long-running lawsuit in a California state court. The debtor had taken out a loan in 2007 and had signed a guaranty agreement for another loan. The bank assigned both loans to the creditor, as the bank’s receiver, in mid-2009. The creditor filed suit against the debtor, in his capacity as the borrower on one loan and the guarantor on the other, in December 2009.

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Constant Wauters [Public domain], via Wikimedia CommonsBankruptcy offers relief to people and businesses in financial distress, allowing them to pay down debts over a period of time, or pay them down quickly by liquidating assets. A court may then grant a discharge of some unpaid debts. The bankruptcy process is not, however, supposed to give people a way out of debts incurred because of dishonest or unlawful acts. Congress has placed provisions in the Bankruptcy Code that except certain types of debt from discharge. A California district court recently considered the appeal of creditors who alleged that their claim against a debtor was excepted from discharge because it involved false pretenses. In re De Long, No. 2:14-cv-02947, order (E.D. Cal., Jan. 7, 2016).

The Bankruptcy Code bars a wide range of debts from discharge. 11 U.S.C. § 523(a). In some cases, such as child support obligations and student loans, an entire class of debt is excepted from discharge. Other exceptions are based on the manner in which the debtor incurred the debt, including debts for something of value “to the extent obtained by…false pretenses, a false representation, or actual fraud…” Id. at § 523(a)(2)(A). Creditors may ask a bankruptcy court to find that a debt is not subject to discharge under this section, after providing notice to all parties and conducting a hearing. Id. at § 523(c)(1).

The debtor in the De Long case owned and operated a construction company in Sacramento, California. The creditors, a married couple, hired the company to work on their home. The original contract between the parties, signed in June 2010, included a total project cost of $246,000 and a payment schedule. The creditors eventually paid the construction company a total of $189,400, but they hired another contractor in late 2011 to complete the job.

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By Frank T. Merrill (1848-1923), L.S. Ipsen, John Harley (Gutenberg.org) [Public domain], via Wikimedia CommonsContrary to many popular misconceptions about bankruptcy, declaring bankruptcy does not necessarily mean that a person is “broke.” It means that, even if the person has cash or other assets on hand, they cannot continue to make payments on their debts and other obligations with their available income and assets. Sometimes, though, a person is in such financial distress that they must ask the bankruptcy court to waive the filing fee and other court costs. This is known as a request to proceed in forma pauperis. A California district court recently considered such a request from a Chapter 7 debtor. Following the magistrate’s finding that the debtor did not make the request in good faith, the judge denied it. In re Gjerde, No. 2:15-mc-0013, findings and recommendations (E.D. Cal., Oct. 26, 2015), order (Nov. 13, 2015).

As with any legal proceeding, bankruptcy courts require a payment of fees for new cases. In the Central District of California, which includes Los Angeles, the filing fee for a Chapter 7 bankruptcy petition is $335, and $310 for a Chapter 13 petition. Most other new bankruptcy filings have a much higher fee of $1,717. Reopening a case also requires the payment of a fee—$260 for a Chapter 7 case and $235 for Chapter 13. The court charges fees to amend bankruptcy schedules, to file certain motions, and to issue certain documents like abstracts of judgment. Converting a Chapter 7 case to Chapter 13 is free of charge, but a conversion in the opposite direction costs $25.

Numerous federal statutes and rules address in forma pauperis requests for a wide range of fees, including the cost of obtaining a transcript, 28 U.S.C. § 753(f), and most or all fees associated with an appeal. Fed. R. App. P. 24. U.S. district courts have discretion to permit a waiver of fees if the requesting party submits an affidavit stating that they are unable to pay, or provide security for, the required fees. The court may not grant the request if it “certifies in writing that [the request] is not taken in good faith.” 28 U.S.C. § 1915(a)(3). While the same general standards as in other federal proceedings govern in forma pauperis requests in Chapter 13 cases, additional requirements apply to Chapter 7 cases. See Guide to Judiciary Policy, Vol. 4, § 820 et seq.

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By Jacob Davies [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia CommonsIn a personal bankruptcy case filed under Chapter 7 or Chapter 13 of the federal Bankruptcy Code, all of a debtor’s non-exempt property becomes the property of a new entity known as the bankruptcy estate. The court will appoint a person to serve as the trustee of the bankruptcy estate. The trustee’s duties depend on the type of case the debtor selects. In some situations, a trustee may find it necessary to keep a debtor “out of the loop” regarding all or part of a bankruptcy proceeding. This occurred in a Chapter 7 case that recently went before a California federal judge, In re Zinnel, No. 2:12-cv-00249, mem. order (E.D. Cal., Nov. 17, 2015). The court found that the trustee was entitled to a “protective order” preventing the debtor from formally requesting information about estate activities. However, this does not occur often. In most cases, the fact that a Debtor’s property is considered ‘property of the estate’, is actually a good thing since this fact will also allow the debtor to enjoy certain benefits and protection from creditors while the bankruptcy case is pending.

Protective orders—which protect information in the context of a bankruptcy case—are available in a variety of situations. The Bankruptcy Code authorizes courts to issue orders sealing case materials, which would ordinarily be public record, if they involve trade secrets, “scandalous or defamatory” information, or information that could be used in identity theft. 11 U.S.C. § 107. Procedural rules allow protective orders for information that might not become part of the public court file, if a court finds that the request for information will cause “annoyance, embarrassment, oppression, or undue burden or expense.” Fed. R. Bankr. P. 7026, Fed. R. Civ. P. 26(c). This type of order states that a party is not obligated to respond to discovery requests, or is only obligated to respond to a limited extent.

The debtor in Zinnel originally filed a Chapter 7 bankruptcy petition in July 2005. The case was closed at some point prior to June 2011, which was when the Office of the U.S. Trustee applied to the court to reopen the case on the grounds that the debtor might not have included certain assets in his schedules. Prosecutors had recently indicted the debtor for several bankruptcy-related offenses.

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