Articles Posted in Chapter 7

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A debtor in an involuntary Chapter 7 bankruptcy case has made several unsuccessful attempts to dismiss the case, with the most recent attempt drawing a mild rebuke from the court. In re Viola, No. 4:11-cv-00817, order (N.D. Cal., Mar. 19, 2014). The district court held that the debtor lacked standing to challenge some parts of the case in that forum, and should have raised the issues in the bankruptcy court. It further found that he had not shown cause for relief from the bankruptcy court’s judgment or its own prior orders.

The court notes in its most recent order that the debtor is a “convicted fraudster.” A creditor filed an involuntary bankruptcy petition against him in March 2010. Creditors may file a petition against a person under either Chapter 7 or Chapter 11, provided that the creditors and the debtor meet various criteria set out at 11 U.S.C. § 303. The debtor commenced the present case in U.S. District Court almost a year later, in February 2011. He filed a motion to withdraw the reference from the bankruptcy court. District courts, by law, have original jurisdiction over bankruptcy proceedings, but generally refer them to the bankruptcy courts. A district court can withdraw the reference for cause, and it must do so if it determines that a case mixes questions of law involving bankruptcy and other areas. 28 U.S.C. § 157(d).

Several months later, the debtor filed a motion to stay the bankruptcy court’s order allowing the sale of certain vehicles that he owned, but the district court held that he lacked standing to bring that claim in district court. The debtor filed a motion for relief from judgment under Federal Rule of Civil Procedure 60(b) in November 2011. The court denied both the motion to withdraw the reference and the motion for relief from judgment in an order dated September 28, 2012. It held that his motion to withdraw the reference was untimely, coming almost a year after the commencement of the bankruptcy case. Since the bankruptcy court had handled numerous proceedings in the case, the district court held that withdrawing the reference would “likely have an adverse impact on judicial economy and the administration of justice.” Viola, order at 2, n. 1. Continue reading

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An inventive use of federal bankruptcy law enables some debtors to eliminate liens from their homes through a process known as “Chapter 20.” The name refers to the sum of 7 and 13, since the process uses both Chapter 7 and Chapter 13 proceedings. Not all courts agree that Chapter 20 lien stripping is permissible after the changes made by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Federal courts in different parts of California have reached different conclusions about Chapter 20. The Fourth Circuit Court of Appeals on the East Coast joined the ranks of courts that have affirmed the process last year. In a 2-1 ruling, the court offered an overview of how Chapter 20 works and the objections against it. In re Davis, 716 F.3d 331 (4th Cir. 2013).

The court heard appeals brought by the bankruptcy trustees in two Chapter 13 cases. In both cases, the debtors initially filed Chapter 7 petitions and obtained final discharges. A discharge in a Chapter 7 case removes a debtor’s personal liability, but still allows a creditor to collect against any collateral. In both cases, the value of the debtors’ residences was significantly less than the amount of indebtedness secured by the homes. In one case, a home valued at $270,000 had first-, second-, and third-priority liens totaling more than $508,000. The debtors filed Chapter 13 petitions less than four years after their Chapter 7 discharges, seeking to strip the worthless, low-priority liens from their residences. The bankruptcy courts approved the debtors’ requests, and the trustees appealed.

Chapter 13 generally allows stripping of worthless liens against debtors’ homes, but it does not allow a final discharge of debt if the case was filed within four years of a Chapter 7 discharge. 11 U.S.C. § 1328(f)(1). A Chapter 20 proceeding works around this restriction, as the court describes. A court may determine that a low-priority lienholder’s claim is unsecured if the total value of all secured claims is greater than the value of the collateral. 11 U.S.C. § 506(a). Now that the lienholder is an unsecured creditor, the court has the authority to modify their rights, which includes stripping the lien from the property. Davis, 716 F.3d at 335, citing 11 U.S.C. § 1322(b)(2). Continue reading

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Student loan debt is a growing burden for people in Los Angeles and all over the country, as the cost of higher education seems to grow faster than the job market. Student loan debt is also one of the few types of debt that is almost never subject to discharge in a bankruptcy case. A recent article in the Wall Street Journal gave several examples of the lengths to which educational lenders sometimes go to oppose discharge of these debts. Some of the stranger arguments did not convince the judges who decided those specific cases, but the mere fact that lenders feel comfortable raising them in court demonstrates the importance of having the help of a skilled and experienced personal bankruptcy lawyer.

Courts rarely discharge student loans at the end of a Chapter 7 or Chapter 13 case, because they are subject to their own separate rule. A debtor must prove that the debt would impose an “undue hardship” on them and their dependents. 11 U.S.C. § 523(a)(8). Courts have often interpreted the term “undue hardship” very strictly. The Brunner test, which most courts have adopted, requires a debtor to prove (1) that repaying the loan would leave the debtor unable to “maintain a minimal standard of living” on current income and expenses, (2) that “the state of affairs is likely to persist” for most or all of the repayment period due to “additional circumstances,” and (3) that the debtor “has made good faith efforts” at repayment. Brunner v. New York State Higher Educ. Serv. Corp., 831 F.2d 395, 396 (2nd Cir. 1987).

In one of the cases discussed in the Wall Street Journal article, a debtor sought to discharge a $2,500 student loan in a Chapter 7 proceeding. The lender, in arguing that the debtor had failed to reasonably maximize her income and minimize her expenses, noted that she had given birth to three children since taking out the loan, despite being unmarried and having health problems that interfered with her ability to work. In re Ivory, 269 B.R. 890, 910 (Bankr. N.D. Ala. 2001). The court rejected this argument and ruled for the debtor, stating that “[t]here is nothing in the Bankruptcy Code that suggests that Congress did not intend for student loan debtors to procreate.” Id. at 911. Continue reading

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Credit card debt can be incredibly stressful for people experiencing financial difficulties. High interest rates and late fees, along with increasingly high minimum payments, may make final payment of the debt seem impossible. The bankruptcy system may allow the discharge of some or all of a person’s credit card debt. It prevents discharge, however, of debt(s) incurred fraudulently or in bad faith, such as if a person charges a large amount to a credit card shortly before a planned bankruptcy filing.

Unsecured vs. Secured Debt

Most credit card debt is unsecured, meaning that the creditor does not have the right to repossess property, known as collateral, if the debtor defaults. In the case of a credit card issued by a retail store, the store may have the legal right to repossess whatever items the debtor purchased, although it is not always financially feasible to do so. Secured debt, such as a mortgage or car loan, generally receives higher priority for repayment from the bankruptcy estate than unsecured debt.

Bankruptcy Schedule F

Certain unsecured debts, such as child support or tax debt, are treated as “priority claims,” while the rest are “nonpriority claims.” A debtor filing for personal bankruptcy under Chapter 7 or Chapter 13 must complete Schedule F, which identifies creditors who have “unsecured nonpriority claims.” Most forms of credit card debt go on this schedule. Continue reading

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A bankruptcy court recently denied a creditor’s motion to reopen a Chapter 7 case after discharge, finding that the creditor had failed to follow the proper procedure to preserve their claims. In re Lavandier, No. 14-bk-12553, mem. dec. (Bankr. S.D.N.Y., Aug. 27, 2015). The creditor sought to extend the deadline to claim an exception from discharge, 11 U.S.C. § 523; and to object to discharge, 11 U.S.C. § 727. The court held that, by not following the procedures established by the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure, the creditor had not established good cause to reopen the case.

The creditor, a money transmitter, entered into an agency agreement with a corporation wholly owned by the debtor in 2009. Under this agreement, the corporation would accept money from customers on the creditor’s behalf to send overseas. The debtor signed a guaranty agreement making him personally liable for all money owed by the corporation to the creditor.

In 2013, the creditor filed suit in state court to recover amounts owed under the agency agreement. It obtained a default judgment holding the corporation and the debtor jointly and severally liable for more than $54,000. The debtor filed for Chapter 7 bankruptcy in September 2014.

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A California bankruptcy court ruled that a debtor couple’s federal tax liabilities were subject to discharge under Chapter 7 of the Bankruptcy Code. In re Martin, 508 B.R. 717 (Bankr. E.D. Cal. 2014) (PDF file). The debtors did not file Form 1040 tax returns for those tax years before the IRS assessed the amount of tax liability and began efforts to collect the debt. The court had to determine when tax liability becomes a “debt” for purposes of bankruptcy law:  when the IRS assessed the debt or when the debtors filed their returns. It ruled that the filing of the returns was the critical factor, and therefore it ruled for the debtors.

According to the court’s ruling, the debtors, a married couple, did not file federal income tax returns for the tax years 2004, 2005, and 2006. The IRS conducted an audit of the debtors in June 2008. The following August, it sent them a “notice of deficiency” for each of the three years. An accountant completed the three tax returns for the debtors in December 2008, but the debtors did not sign the returns or send them to the IRS until June 2009.

Meanwhile, in March 2009, the IRS assessed the debtors’ total tax liability and sent them several notices and demands for payment. It issued a due process notice, which initiated the collection process, in late May 2009. The debtors signed the returns and mailed them to the IRS about a week later.

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Chapter 7 bankruptcy enables qualifying debtors to pay down their debts by liquidating their non-exempt assets, followed by a discharge of many remaining debts. In order to qualify for a Chapter 7 discharge, debtors must demonstrate that they meet the criteria set out in the “means test,” 11 U.S.C. § 707(b). A trustee or creditor may ask the court to convert a Chapter 7 “liquidation” case to a Chapter 11 “reorganization” case for good cause, such as if they believe that the debtor does not qualify under the means test. Individual debtors rarely use Chapter 11, but a court cannot convert a Chapter 7 case to Chapter 13 without the debtor’s agreement. 11 U.S.C. § 706(c). A bankruptcy court recently ruled that a married couple could not file under Chapter 7 and essentially encouraged them to use Chapter 13 instead. In re Decker, No. A14-00065, memorandum (D. Alaska, Mar. 31, 2015).

The debtors in Decker have a complicated history of financial problems, as described by the bankruptcy court. Their adult daughter has required their ongoing support for medical problems and addiction recovery since 2009. The debtors began having serious issues with the Internal Revenue Service (IRS) in 2007, when it assessed deficiencies for the previous two tax years. Those debts have reportedly continued to accrue.

When the debtors filed their Chapter 7 petition in March 2014, they identified almost $426,000 in debts. Debts owed to the IRS included over $102,000 in priority debt and $81,000 in non-priority debt. The IRS filed a proof of claim for more than $204,000 in taxes, interest, and penalties. They also identified tax debts owed to the states of California and Alaska. The $35,000 in personal property identified in their schedules is all exempt or subject to liens.

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The loss of a job is one of the biggest factors that lead people to file for Chapter 7 and Chapter 13 bankruptcy. State and federal programs exist to assist people who have lost their job and are looking for a new one. When losing a job puts a person in such financial distress that they must consider bankruptcy, the question emerges as to whether or not unemployment benefits constitute “income” for the purposes of a bankruptcy case. The short answer to that question is yes, it is considered income. The answer can be more complicated, however, when applied to specific parts of the bankruptcy process, like the Chapter 7 means test.

California, like most states and the federal government, maintains a system of unemployment insurance (UI). Employers pay into the insurance fund, which is available to pay temporary benefits to qualifying former employees. In order to qualify for benefits, individuals must have lost their job through no fault of their own, such as through a layoff; must have received a minimum amount of wages during an earlier 12-month period; and must be physically capable of working, willing to work, and actively seeking work. The amount provided through these programs is usually not much, but it at least keeps people from losing any and all income.

The general rule in bankruptcy is that unemployment compensation received through state or federal UI programs is included in a debtor’s income calculations. Chapter 7 bankruptcy cases rely on a “means test” based on a debtor’s “current monthly income.” A debtor whose “current monthly income” is greater than a certain amount, determined by a rather complicated formula, is not eligible for Chapter 7 bankruptcy. 11 U.S.C. § 707(b)(2). Some courts disagree on whether this income calculation includes unemployment compensation.

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Business owners, entrepreneurs, and investors often create business entities as a means of protecting themselves from liability, as well as protecting their business or investment from their own liability. If an individual debtor has some form of individual liability for unlawful business activity, however, those activities may be considered a factor in the bankruptcy proceeding. This was the case in a claim brought by the U.S. Department of Labor (DOL) against a business owner accused of withholding employee retirement contributions in violation of the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et seq.

The debtor was the sole member and manager of a limited liability company (LLC) organized in Massachusetts. The LLC operated a weight loss business through a Jenny Craig franchise at eight locations around New York state. It established a retirement plan and trust for its employees in 2012, with the debtor named as the plan’s fiduciary and trustee. Employees funded the plan through contributions withheld from their paychecks. The debtor was responsible for transferring the withheld amounts to the employees’ retirement plan accounts.

The DOL claimed that the debtor failed to transfer a total of $8,646.00 to the plan during pay periods in 2012 and 2013. Under ERISA, funds withheld from an employee’s paycheck for the purpose of contributing to a retirement plan automatically become an asset of that plan, and the plan’s trustee has a fiduciary duty to remit those funds to the plan promptly. The debtor, according to the DOL, violated ERISA by failing to transfer those funds to the retirement plan. Continue reading

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The Ninth Circuit Court of Appeals recently issued a series of rulings addressing the rights of Chapter 7 debtors to the funds in their bank accounts. In re Mwangi (“Mwangi I”), 764 F.3d 1168 (9th Cir. 2014); In re Mwangi (“Mwangi II”), No. 14-15265, slip op. (9th Cir., Oct. 21, 2014). The debtors, a married couple, claimed exemptions on several bank accounts and sought sanctions against the bank when it refused to lift an administrative freeze. The appellate court held that the accounts remained part of the bankruptcy estate until the deadline for creditors to object to the debtors’ claimed exemptions had passed, and then the accounts re-vested in the debtors. Since the alleged automatic stay violation occurred before re-vesting, the court held that the debtors lacked standing. Only the trustee has standing to bring claims to protect assets in the bankruptcy estate.

The debtors filed for Chapter 7 bankruptcy in August 2009. They held four accounts at Wells Fargo Bank at the time with a total balance of about $17,000, which they did not claim as exempt in their original Schedule C. Wells Fargo runs an automated computer program that compares the names of new Chapter 7 cases to those of account holders. It put an administrative freeze on all four accounts shortly after the debtors filed their petition and notified them by mail. It also notified the trustee, who instructed it to hold the funds until further instructions, or until 31 days after the creditors’ meeting.

About a week after the filing date, the debtors filed an amended Schedule C that claimed exemptions in 75 percent of the value of the four accounts, citing a state law that exempts that amount of disposable earnings. Nev. Rev. Stat. § 21.090(1)(g). They asked Wells Fargo to lift the freeze on the accounts, which it refused to do without the trustee’s agreement. Continue reading