Articles Posted in Exempt Property

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By VISALIA2010 (Own work) [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia CommonsA California bankruptcy judge recently ruled on a series of motions in a Chapter 7 case, including an effort by the debtors to have their residence declared exempt under California law and a motion by the court-appointed trustee to compel them to turn the property over to him. The trustee alleged that the debtors undervalued the residence in their original schedules, that they did not heed his warnings about the type of exemption they were claiming, and that the amended schedules they filed were not filed in good faith. He sought turnover of the property because he had already entered into a contract to sell it. The court ruled in the trustee’s favor. In re Gutierrez, No. 12-60444, mem. decision (E.D. Cal., Jan. 29, 2014).

The debtors filed a Chapter 7 bankruptcy petition in December 2012. Their Schedule A listed a residence in Visalia, California valued at $127,748, with two mortgages totaling $115,050. They claimed the equity of $12,698 as exempt, using California’s “wild card” exemption defined in Cal. Civ. Pro. Code § 703.140(b)(5). They claimed five other assets as exempt, with a total claimed value of $17,927. At the creditors’ meeting in January 2013, the trustee told the debtors that the residence had more equity than they claimed and was therefore more than they could claim under the “wild card” exemption. He “implicitly suggested” that they look at other exemptions allowed by California law. Gutierrez, mem. dec. at 3.

About a week later, the court issued a notice to creditors to file proofs of claim, meaning it anticipated the sale of assets by the trustee. The court entered a discharge without objection that April. The trustee moved for leave to hire a real estate broker in July. The debtors’ only response was to file a motion to convert the case to Chapter 13. The court granted the motion for sale. It authorized the trustee to sell the residence for $165,000, significantly more than the value claimed by the debtors. It denied the debtors’ motion.

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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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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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By Randy from Newbury Park, California, USA (Hidden Valley  Uploaded by PDTillman) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia CommonsA U.S. district court in Los Angeles affirmed a bankruptcy court’s order finding that a judgment creditor willfully violated the automatic stay in a Chapter 13 case. In re Bayley, No. 2:14-cv-07799, order (C.D. Cal., Jan. 14, 2015). The automatic stay takes effect the moment a bankruptcy petition is filed. 11 U.S.C. § 362(a). Violations of the automatic stay may be subject to penalties by the court, with greater penalties for violations found to be “willful.” The present case demonstrates how a court could find that a party’s violation was willful despite a claimed mistake of law.

The creditor at issue in this decision obtained a judgment against the debtor in a Ventura County court in August 2011, in an amount approaching $13,000. A lien on real property owned by the debtor in Thousand Oaks secured the judgment. The court in Ventura County issued a writ of execution about two years later, and in January 2014, the Los Angeles County Sheriff’s Department (LASD) served the debtor’s bank with a writ of garnishment. The LASD levied $4,000 from the account that February.

About two weeks after the levy, the debtor filed a Chapter 13 bankruptcy petition. The LASD was still in possession of the $4,000 at the time. The debtor included the $4,000 in her Schedule B list of personal property, and she claimed it as exempt in Schedule C under California’s “wild card” exemption, Cal. Code Civ. P. § 703.140. She then filed a motion to avoid the real property lien. The creditor did not object to the debtor’s claimed exemption or her motion.

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GotCredit [CC BY 2.0 (https://creativecommons.org/licenses/by/2.0/)], via FlickrA bankruptcy judge in California considered a Chapter 7 trustee’s objection to a debtor’s exemption claim. The debtor claimed that a large retirement account was exempt from Chapter 7 liquidation under California law. The court identified two factual questions, but found that it first had to address a legal question:  who has the burden of proof in an objection to an exemption claimed under state law? The court ultimately ruled that, while the objecting party usually has the burden of proof under federal law, the debtor bears this burden for exemptions under California law. It set the case for an evidentiary hearing on the exemption. In re Pashenee, No. 14-30386-5-7, opinion (Bankr. E.D. Cal., Jun. 8, 2015).

The debtor filed a Chapter 7 bankruptcy petition in October 2014. She claimed an individual retirement account (IRA) with a balance in excess of $380,000 as exempt in her schedules. She cited a provision of California law that states that payments from a pension, annuity, “or similar plan or contract on account of illness, disability, death, age, or length of service,” are exempt in a bankruptcy proceeding, with some exceptions, to the extent that payments are “reasonably necessary for the support of the debtor” and the debtor’s dependents. Cal. Code Civ. P. § 703.140(b)(10)(E).

The Chapter 7 trustee objected to the exemption and alleged that the debtor is required to prove that the IRA qualifies for an exemption and that the amount of the claimed exemption is “reasonably necessary” as stated in the statute. The trustee argued that the debtor has the burden of proof under state law. Cal. Code Civ. P. § 703.580(b). The debtor, citing federal bankruptcy rules, claimed that the trustee, as the objecting party, has the burden of proving that the debtor’s claimed exemptions are improper. Fed. R. Bankr. P. 4003(c). The court determined that it must resolve the burden of proof question before considering the exemption itself.

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401(K) 2012 [CC BY-SA 2.0 (https://creativecommons.org/licenses/by-sa/2.0/)], via FlickrA married couple claimed exemptions in several annuity contracts in their Chapter 7 bankruptcy case. The trustee objected under state law, arguing that the debtors were only allowed to exempt a maximum of $250 in monthly payments from the annuities. The court disagreed, finding that state law gives it the authority to exempt the total amount of the annuity payments. In re Nichols, No. 14-60974-7, mem. dec. (Bankr. D. Mont., Jan. 12, 2015). Although the court applied Montana law in reaching its decision, California law has similar provisions that apply in bankruptcy cases.

The debtors filed for Chapter 7 bankruptcy in August 2014. They stated that the husband is retired and the wife is unemployed, and that they have total monthly income of just over $3,000. The monthly expenses listed in the debtors’ Schedule J was reportedly only $3.96 less than their stated income. The debtors’ income came from social security, VA disability, and five annuity contracts, according to the court. The husband inherited six annuity contracts from his mother. Their original monthly payment amount was $1,442.98. At the time of the bankruptcy court’s order, only five of the annuity contracts remained. One of them will continue payments for the husband’s lifetime, and the other three will continue payments until January 2016.

The trustee objected to the debtors’ claimed exemption of the annuity contracts, citing a state law provision that limits this sort of exemption to $250. Mont. Code § 33-15-514(1)(b). The trustee conceded that $250 of the monthly annuity payments were subject to exemption, but she argued that the remainder were not. She also claimed that a provision increasing the exemption amount to $350, found in § 33-15-415(1)(c), did not apply because the annuity contracts were the property of the bankruptcy estate. The trustee argued in the alternative that the husband’s monthly social security and VA income were greater than his one-half share of the debtors’ monthly expenses, and that the court therefore should not allow exemption of more than $250 of the annuity payments.
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seier+seier [CC BY 2.0 (https://creativecommons.org/licenses/by/2.0/)], via FlickrA U.S. magistrate judge in California ruled on a very unusual set of circumstances in a bankruptcy case, Thomas v. Bostwick, No. 13-cv-02544, order (N.D. Cal., Aug, 29, 2014). A creditor had filed a lien against the possible proceeds of a lawsuit filed by the debtor against the creditor. The creditor was the debtor’s former employer, and the two had been involved in both civil and criminal legal proceedings for some time. The debtor had claimed the proceeds of the lawsuit as exempt property in his bankruptcy petition. Regardless of the parties’ prior history, the court agreed that the lawsuit proceeds were exempt.

In 2009, the creditor obtained a $19.8 million civil judgment against the debtor for embezzlement, as well as an order for criminal restitution of about $8.8 million. The creditor later liquidated its employee profit-sharing plans and transferred over $21,000 from the debtor’s account to itself, as partial payment of the debtor’s judgment debts. The debtor filed suit against the creditor for alleged breach of fiduciary duty, claiming that the profit-sharing plan included provisions against alienation mandated by the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et seq., and that the creditor wrongfully ignored those provisions. The lawsuit was still pending when the debtor filed for bankruptcy in 2012.

The debtor filed an amended Schedule C in June 2012, identifying exempt personal property, including the potential proceeds of the lawsuit against the creditor “for converting pension plan accounts.” Thomas, order at 2. At some point, the creditor filed a notice of lien on the proceeds of the debtor’s lawsuit against it, but it did not object to the debtor’s Schedule C. Continue reading

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tpsdave [Public domain, CC0 1.0 (http://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayThe Bankruptcy Appellate Panel (BAP) for the Ninth Circuit vacated the ruling of a bankruptcy judge, finding that the debtor in a Chapter 7 case might be entitled to exempt certain real property as his homestead. In re Calderon, 507 B.R. 724 (BAP 9th Cir. 2014) (PDF file). The bankruptcy court sustained the trustee’s objection to the debtor’s claimed exemption because the debtor did not live at that property. The federal Bankruptcy Code includes provisions for property exemptions but allows states to apply their own exemptions. In California, for example, state law governs exemptions in all personal bankruptcy cases. The BAP found in Calderon that the laws of the debtor’s state, Arizona, applied to his case, and that Arizona law allows the exemption of a homestead where a debtor does not live under certain circumstances.

The debtor and his wife purchased the residence at issue in 2002. They both lived there until they divorced in March 2011. The debtor became the sole owner of the residence under the terms of their divorce settlement, but he moved out shortly after the divorce was finalized. He moved into a rental house and kept all of his belongings with him there. He leased the residence to a couple with a one-year lease that began on May 1, 2012 and expired April 30, 2013, with an option to renew.

In July 2012, the debtor filed for Chapter 7 bankruptcy. He initially used the rental home as his home address and identified the residence as rental property. In September 2012, he filed an amended Schedule C that claimed a homestead exemption in the residence under Arizona law. A.R.S. § 33-1101(A). He claimed the residence was worth about $300,000 and that he had about $84,000 in equity. Continue reading

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FarmerT from morguefile.comThe U.S. Supreme Court ruled against the trustee in a Chapter 7 case who had obtained a bankruptcy court’s leave to pay attorney’s fees, incurred as a result of fraud by the debtor, from the debtor’s exempt assets. Law v. Siegel, No. 12-5196, slip op. (Sup. Ct., Mar. 4, 2014). While a court may impose other sanctions on a debtor for fraud and other misconduct, the court held that use of exempt assets in such a situation exceeds a bankruptcy court’s discretionary authority under 11 U.S.C. § 105(a).

The debtor filed a Chapter 7 bankruptcy petition in 2004. He listed a house with a value of $363,348 as his only asset, and claimed the $75,000 of that value was exempt under California law. Cal. Civ. Proc. Code § 704.730(a)(1). He also identified two liens encumbering the house held by Washington Mutual Bank for $147,156.52 and Lin’s Mortgage and Associates for $156,929.04. Since the sum of the two liens exceeded the claimed value of the house, the debtor alleged that the house had no equity.

The trustee filed an adversary proceeding several months later, claiming that the second lien was fraudulent. An individual named Lili Lin, who claimed to be the beneficiary of the deed of trust to Lin’s Mortgage and Associates, tied the case up in litigation for about five years. The bankruptcy court ruled in 2009 that the loan from Lin was a “fiction” meant to enable the debtor to keep the house. Law, slip op. at 3. It further found that the trustee had incurred over $500,000 in attorney’s fees, and it granted the trustee’s motion to “surcharge” the debtor’s $75,000 exemption to put towards those fees. Id. at 4. Continue reading

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kakisky from morguefile.comA federal district court affirmed a bankruptcy judge’s order converting a Chapter 13 bankruptcy to a Chapter 7 based on a finding of bad faith on the part of the debtor. In re Killian, No. 3:12-cv-03156, order (C.D. Ill., Sep. 30, 2013). Federal bankruptcy law allows a court to dismiss a case, or to convert it to a different chapter, for cause. The bankruptcy court found that the debtor failed to disclose, among other transactions, a transfer of cash that occurred just days before he filed his Chapter 13 petition, and held that he filed the petition in bad faith. It ordered a conversion to Chapter 7 to protect the creditors’ interests.

A debtor may wish to convert their case from one chapter to another for a near-infinite number of reasons, but this option is only available automatically once. The law specifically prohibits conversion of a case that has already been converted unless specifically set for hearing. 11 U.S.C. §§ 706(a), 1307(b). In a Chapter 13 case, the court can dismiss the case or convert it to a different chapter if a party in interest or the trustee makes a motion and shows cause. “Cause” may include material failures by the debtor to comply with court orders or the Chapter 13 bankruptcy plan, 11 U.S.C. § 1307(c), but may also involve a showing of the debtor’s bad faith. Marrama v. Citizens Bank of Massachusetts, 127 S. Ct. 1105, 1113-14 (2007).

A conversion by the court in such a case should serve “the best interest of the creditors.” Killian, order at 11. Most personal bankruptcies are filed under either Chapter 7 or Chapter 13. Each offers distinct advantages depending on an individual debtor’s circumstances. From a debtor’s perspective, a Chapter 13 case could safeguard certain assets that a trustee might sell in a Chapter 7 case. Creditors, however, might want to convert a Chapter 13 case to a Chapter 7 if the debtor has not made a full disclosure of all assets. A creditor could then ask the court to find that a previously-undisclosed asset is non-exempt. Continue reading