Articles Posted in Bankruptcy Procedures

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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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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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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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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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mireyaqh [Public domain, CC0 1.0 (https://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayPersonal bankruptcy under Chapters 7 and 13 offer ways for people to obtain financial relief when their income is not high enough to continue making required payments on their debts. The federal Bankruptcy Code deals with different types of debt in different ways. The Bankruptcy Code establishes that certain types of debt have priority over others, and these creditors are therefore entitled to payment from the bankruptcy estate first. While many debts may be subject to discharge at the end of a personal or business bankruptcy case, some debts are expressly excepted from discharge, such as debts for recent taxes or child support obligations. However, these priority debts can be paid back via a Chapter 13 over a period of 3 to 5 years. Understanding how bankruptcy law treatss various types of debt is critical to planning and preparing for a bankruptcy filing.

Secured vs. Unsecured Debt

A key distinction in bankruptcy is between secured and unsecured debts. A secured debt has one or more specific items of property attached to it, known as collateral. See 11 U.S.C. § 506. A secured creditor has the right to take possession of the collateral if the debtor defaults on their repayment obligation. A mortgage, for example, is typically secured by the real property purchased with the mortgage loan.

Unsecured debt does not have collateral. The Bankruptcy Code divides unsecured debts into priority and nonpriority debts. 11 U.S.C. § 507. Many priority unsecured debts are also included in the list of debts excepted from discharge. 11 U.S.C. § 523.

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old manSeniors, generally defined as people age 65 or older, comprise a growing percentage of the U.S. population. According to the Administration on Aging, part of the U.S. Department of Health and Human Services, seniors accounted for 14.5 percent of the population in 2014. That percentage is expected to increase to 21.7 percent by 2040. A greater and greater number of people want to retire, or are no longer able to work, and must rely on various types of fixed income. Increased health care costs for the myriad medical issues that seniors face will become an increasingly pressing concern. While specific debts are not necessarily passed on to a person’s heirs, creditors can cause considerable havoc in a person’s estate. Seniors who find themselves in financial distress may find that bankruptcy offers some solutions. Many types of income that seniors receive are exempt from creditors both before and during a bankruptcy case, and many debts commonly associated with seniors are unsecured and therefore subject to discharge in bankruptcy.

Debtors filing for personal bankruptcy usually choose between Chapter 7 and Chapter 13. In a Chapter 7 case, a debtor’s non-exempt assets are liquidated to pay debts, and the court discharges most debts at the end of the case. A Chapter 13 case involves a repayment plan that lasts several years, followed by a discharge. While some debts are not subject to discharge, bankruptcy can result in having most of one’s unsecured debts wiped out.

A California debtor filing for bankruptcy has two options for claiming property as exempt under California law. The first system allows exemptions for seniors that include up to $175,000 of the equity in their residence, up to $2,300 in motor vehicles, and up to $6,075 in “jewelry, heirlooms, and works of art.” See Cal. Code Civ. P. §§ 704.010 et seq., 704.730. The second system does not include a specific homestead exemption but allows multiple other exemptions and a “wildcard” exemption for property valued up to $24,060. Cal. Code Civ. P. § 703.140.

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By Oparvez (http://www.flickr.com/photos/oparvez/390728321/) [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia CommonsA U.S. district judge affirmed a bankruptcy court’s dismissal of a Chapter 13 case, finding that the debtor did not respond to two separate motions to dismiss filed by the trustee and a creditor. In re Quezada, No. 1:13-cv-00638, mem. op. (D.D.C., Dec. 20, 2013). While this failure to respond would allow the court to treat any issues presented by the motions to dismiss as conceded by the debtor, the court went further and addressed several other reasons for dismissing the petition. The court’s opinion provides a useful guide to various Chapter 13 filing deadlines and the consequences of missing them.

The debtor was the owner of a multi-unit apartment building in Washington, D.C. The beneficiary of the deed of trust, the Dyer Trust 2012-1 (“Dyer”) foreclosed on the property when the debtor fell behind on mortgage payments. It scheduled a foreclosure sale on January 10, 2013, but the debtor filed a Chapter 13 petition two days earlier. The automatic stay therefore prevented the sale.

The Chapter 13 petition did not include all of the documents required by federal law. The bankruptcy court instructed the debtor to file the remaining required financial documents and a Chapter 13 plan of reorganization within two weeks, and later extended that deadline by another two weeks. The trustee had to cancel a creditor meeting scheduled on February 11, 2013 because the debtor still had not filed the required documents. On February 12, the trustee filed a motion to dismiss the petition, in part for the lack of financial documents and a reorganization plan. Dyer filed a separate motion on February 21, citing additional grounds for dismissal. The debtor did not respond to either motion. Continue reading

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By White House photographer Paul Morse [Public domain], via Wikimedia Commons2015 marks the 10-year anniversary of the comprehensive law known as the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, Pub. L. 109-8, 119 Stat. 23. Supporters of the bill claimed that it would streamline the bankruptcy process and cut costs for everyone involved, but analyses of the law’s impact have suggested that creditors received most (or all) of the benefits. Some studies have suggested that BAPCPA has actually caused debtors’ costs to go up. Now that 10 years have passed, let us take a look at the bill and a handful of the changes it brought.

Passage of the Bill

Much of the support for BAPCPA came, unsurprisingly, from creditors. These are often the parties that bear the greatest loss when a bankruptcy court grants a discharge of debt, so they sought changes to the Bankruptcy Code that would ease this burden.

Opponents of the bill covered a wide spectrum, but a major point of contention was the assumption of widespread bankruptcy fraud. It was not clear to many that fraud was occurring at a rate that merited such a radical overhaul. Regardless of the opposition, however, the bill passed both houses of Congress—74 to 25 in the Senate, and 302 to 126 in the House of Representatives. President George W. Bush signed it into law on April 20, 2005.

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