Articles Posted in Exempt Property

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The 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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The 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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A 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

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A debtor unsuccessfully sought the court’s permission for turnover of funds withheld under a wage garnishment order. In re Solorzano, No. 12-11693-CL13, mem. decision and order (Bankr. S.D. Cal., Apr. 12, 2013). The court found the debtor’s motion deficient in multiple areas, but in ruling on the motion, it offered an overview of the requirements, under local and federal bankruptcy rules, for obtaining turnover of property to the bankruptcy estate during a pending case.

According to the court’s order, the San Diego County Sheriff’s Office served an “earnings withholding order” (EWO) on the debtor’s employer in July 2012, and that the employer sent the sum of $1,127.70 to the sheriff’s office as a result. The debtor filed for Chapter 13 bankruptcy in 2012. The court does not identify the purpose of the EWO, such as a domestic relations order for child support or spousal maintenance, or withholding for a judgment lien. The debtor filed an ex parte motion asking the bankruptcy court to authorize turnover of the funds in the sheriff’s possession to the bankruptcy estate. The trustee for the bankruptcy estate reportedly did not object to the turnover, but the court denied the motion.

The court first noted that a request for turnover of property to the bankruptcy estate requires an adversary hearing under both local and federal rules. The debtor’s ex parte motion was therefore not acceptable. The court nevertheless continued to review the motion, beginning with the debtor’s standing to seek turnover independent of the trustee. Continue reading

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A bankruptcy case often involves the sale of a debtor’s assets in order to pay substantial amounts of debt. This has led to some popular misconceptions that a bankruptcy case will leave a person homeless and destitute. Bankruptcy law allows debtors to claim exemptions, up to a certain monetary amount, on their home, their vehicle, personal property, and other assets, in order to ensure that they can emerge from bankruptcy and still be able to live their lives. Federal bankruptcy law allows each state to use exemptions defined in the federal code, or to enact exemptions at the state level. California has chosen to use state exemptions, and it has two different exemption systems, known as “System 1” and “System 2.” A debtor should carefully review and understand these systems when preparing for a bankruptcy filing. The assistance of a skilled bankruptcy attorney who understands California’s exemption laws is indispensable.

Advantages of Using System 2 Exemptions

System 2 exemptions apply exclusively to bankruptcy cases, while System 1 is derived from California’s law relating exemption of assets in the enforcement of money judgments. Its homestead exemption is small compared to that of System 1, but it offers larger exemptions for other assets, such as vehicles. System 2 also allows a “wild card” exemption, which could apply to any asset the debtor chooses.

Homestead Exemption

A debtor using System 2 exemptions can claim up to $24,060 of value in their residence, defined in the statute as real or personal property, or a part of a cooperative. Cal. Civ. Pro. Code § 703.140(b)(1). The statute applies the same general rules regarding the homestead exemption, which involves the property used as the debtor’s primary residence. Continue reading

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Filing for bankruptcy, particularly Chapter 7, does not mean losing everything you own. While liquidation is undoubtedly a challenging and difficult process for a debtor, state and federal law allow the exemption of some property from the bankruptcy estate, like a debtor’s home, motor vehicle, or essential personal property. In California, state law governs the types and amounts of exemptions that a debtor may claim. It allows a debtor to choose between two systems of exemptions, each offering advantages depending on the debtor’s circumstances. Understanding the available exemptions and exemption systems is critical to preparing for a bankruptcy filing. California’s “System 1” may work for some debtors, while others may prefer “System 2.”

Advantages of System 1 Exemptions

System 1 exemptions are derived from general rules regarding exemptions in the enforcement of money judgments, while System 2 exemptions apply exclusively in bankruptcy proceedings. System 1 allows exemptions for higher monetary values of certain types of property, so it may appeal to debtors who have large amounts of equity in their home or have other high-value items of property. A bankruptcy attorney with knowledge of California’s rules can guide you through the various exemptions.

Homestead Exemption

California defines a “homestead,” for the purposes of exemption from a money judgment, generally as the dwelling in which a debtor, or the debtor’s spouse, lived on the date a judgment lien attached to said dwelling. Cal. Civ. Pro. Code § 704.710(c). A “dwelling” may include a house and the land to which it is attached, a mobile home, a condominium, a boat, or other single- or multi-family structures commonly used as places of residence. Id. at 704.710(a). California law allows exemption of a homestead in bankruptcy, with the maximum exempted amount based on the debtor’s circumstances:
– Single debtor, not disabled: $75,000;
– Family with only one homestead: $100,000;
– Disabled debtor, or debtor age 65 or older: $175,000; or
– Debtor, age 55 or older, earning less than $15,000 per year if single or less than $20,000 if married: $175,000, but only if creditors are seeking involuntary sale of the dwelling. Id. at 704.730(a)(3)(C). Continue reading

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The Bankruptcy Code prohibits a court from discharging debt if a debtor files a Chapter 7 or 13 case too soon after a prior case that resulted in a discharge. Despite this restriction, a few debtors around the country have used a process informally known as a “Chapter 20” bankruptcy. This involves filing a Chapter 13 petition shortly after obtaining a discharge in a Chapter 7. The “20” refers to the sum of 7 and 13. The purpose of such a case is to take advantage of provisions in Chapter 13 that allow removal of certain liens from real property. A Chapter 20 bankruptcy remains highly controversial, and courts disagree about whether it is permissible or not. A debtor considering such a plan should consult with a knowledgeable bankruptcy attorney.

Chapter 20 Bankruptcy

A debtor cannot obtain a discharge of debt in a Chapter 13 case filed within four years after the filing date of a Chapter 7 case that resulted in discharge. 11 U.S.C. § 1328(f)(1). A Chapter 20 bankruptcy involves filing a Chapter 13 petition shortly after concluding a Chapter 7, despite the impossibility of obtaining a discharge, in order to “strip” liens that remain attached to the debtor’s residence.

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A judgment of the California Labor Commissioner, which ordered a debtor to pay back wages to former employees, is not a dischargeable debt in a Chapter 7 bankruptcy, according to a California federal court. In re Han, No. 2:13-cv-1524-ODW, order (C.D. Cal., Jul. 8, 2013). Three former employees of the debtor’s business had obtained administrative judgments for unpaid wages, interest, and penalties. The bankruptcy court ruled against their claims and discharged the debts. The district court reversed the decision and remanded the case.

The debtor owned and operated a cleaning business, Gold Maintenance, Inc., for about ten years. He personally supervised the company’s employees, according to the district court’s order. Three employees, who worked for Gold Maintenance for various periods between 2006 and 2008, filed administrative complaints with the California Labor Commissioner in 2008, alleging that the debtor “required them to work thirteen to fourteen hours per night, five to seven nights per week.” Id. at 2. He agreed to pay “minimum wage,” the employees said, but did not pay them for overtime, double-time, meal or break time, or time spent traveling during work hours. He allegedly wrote checks to himself from the company account for substantial sums during this time. The employees claimed the debtor owed them compensation for unpaid wages, interest, and waiting-time penalties under the California Labor Code. The Labor Commissioner awarded them judgments totaling more than $95,000 in January 2010. Continue reading

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The Ninth Circuit affirmed an order establishing eligibility for relief from the automatic stay in a Chapter 7 case, finding that the copy of the promissory note presented by the bank met the requirements of the Federal Rules of Evidence. In re Griffin, No. 12-60046, slip op. (9th Cir., Jun. 26, 2013). The automatic stay provisions of the Bankruptcy Code generally stop legal proceedings and collection actions against the debtor while the case is pending. The court’s order in the present case only gives the bank the opportunity to argue the merits of lifting the automatic stay.

In most bankruptcy cases, an “automatic stay” takes effect upon the filing of the petition. 11 U.S.C. § 362(a). It prevents the filing of most types of lawsuits against the debtor, enforcement actions for judgments that predate the bankruptcy petition, and the creation or enforcement of liens against the debtor’s property. It also prohibits setoffs of any debts owed to the debtor prior to filing the petition. Legal proceedings that are not subject to the automatic stay include family cases, such as divorce, paternity, and child or spousal support, except for the division of marital property; and most tax proceedings. The automatic stay remains in effect until the court closes or dismisses the case, or the court discharges debts in an individual Chapter 7 case. Other events may result in a lift of the stay, although they depend on the circumstances of the individual case. Continue reading

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In a Chapter 13 bankruptcy case, debtors must provide a calculation of their total monthly income, as well as their total disposable income for a given month. These two amounts are not necessarily the same, as state and federal laws allow a debtor to exclude certain income sources from their “disposable income.” The debtor’s disposable income determines the plan for repayment of debts. A California appellate court recently addressed the question of whether a debtor could exclude his income from a retirement annuity established by an ambiguously-worded federal statute. In re Scholz, No. 11-60023, slip op. (9th Cir., Nov. 15, 2012). The court held that the debtor had to include Railroad Retirement Act annuity income in both his monthly and disposable income.

The debtors, a married couple, filed for Chapter 13 bankruptcy in 2010. In their statement of “current monthly income,” they excluded several thousand dollars of annuity income, which the husband received pursuant to the Railroad Retirement Act of 1974 (RRA). The debtors argued that they did not have to include this amount in their monthly income calculation because federal law provided that annuity payments under the RRA could not be “anticipated.” 45 U.S.C. § 231m(a). The bankruptcy court agreed, over the trustee’s objection, and approved the debtors’ plan, meaning that the husband’s RRA annuity income was not included in their calculation of projected disposable income under 11 U.S.C. § 1325(b)(2). Continue reading

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