For those of you who have been living in a cave without access to any news of the day, I would bring you up to speed on the ever expanding sex abuse/sexual harassment scandal that implicates many famous Hollywood types, politicians, religious leaders, big business execs, . . . , and the list just keeps on growing; but if you’re still living in your cave, you probably won’t read this post.

For those of you who aren’t living in a cave, but haven’t been paying attention to the salacious details, here’s the classic comic book version.  Many famous and powerful people have recently been accused of sexual harassment.  The list of the accused includes both men and at least one woman.  As the list grows, the likelihood that at least one accuser (maybe many more) will file civil actions against the accused increases.  Since this is a bankruptcy blog, our question of the day is:

Question:  Can the accused discharge any financial liability associated with the (alleged) harassment in bankruptcy?

Leaving aside the fact that most, if not all, of the accused are multimillionaires who probably won’t seek bankruptcy protection, the question is still worth addressing because people who don’t occupy the rarified world of big ticket corruption can still face such accusations.
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oh no We sold our house TT seized the moneyI have written several times about exempting assets in bankruptcy.  The gist is that in a Chapter 7 bankruptcy, the debtor gets to keep all assets that are exempt using the appropriate exemption table, but the Chapter 7 Trustee assigned to the case is empowered to seize and liquidate the nonexempt assets for the benefit of the debtor’s creditors.  And in other chapters the value of the nonexempt assets is one of the factors that are used to determine how much the debtor must repay the general unsecured creditors through the plan.

I have also written about the six-month reinvestment requirement for a homestead exemption after a debtor receives the exempt proceeds from the sale of the debtor’s primary residence.  The idea here is that if the debtor has nonexempt equity in the primary residence, the Chapter 7 Trustee will sell the property for the benefit of the creditors, and write the debtor a check for the exemption amount; but the debtor must reinvest the proceeds in a new domicile within six months of receiving the check from the Trustee or else the Trustee can reclaim the money.

When the Trustee sells a nonexempt asset, the sale is, from the debtor’s perspective, an involuntary sale.

In this post I will discuss what happens to the homestead exemption when the debtor voluntarily sells the primary residence, either in bankruptcy, or outside of bankruptcy.
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Mortgage lien stripA very recent opinion from the Bankruptcy Appellate Panel for the Ninth Circuit (“BAP”) establishes the legitimacy of something I have been doing in Chapter 20 cases.  It’s nice to know I was right all along.  This post brings you up to speed on the good news for debtors in the BAP case.  A bit of background will help to put the case into its proper perspective.

If you are new to bankruptcy practice, and have given the Bankruptcy Code a cursory glance, you might think I am out of my mind referring to a Chapter 20 bankruptcy in the tile to this post.  After all, the Code doesn’t even have a Chapter 20.  (Whether or not I am out of my mind is best left to the many voices in my head to determine.  What did you say?  Are you calling my dog a liar?)  The term, “Chapter 20” is used by bankruptcy attorneys to refer to a Chapter 7 followed by a Chapter 13.  Since 7 + 13 = 20, Chapter 20 is used as a short hand.

I.  Reasons For Doing A Chapter 20

Since Chapter 7 discharges most debts without the debtor having to make any payments to creditors, why would anyone want to do a Chapter 20?  One reason lies in 11 U.S.C. § 109(e)’s debt ceilings (I have corrected the dollar amounts, which haven’t been updated at the linked site for quite some time.):

Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525, or an individual with regular income and such individual’s spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525 may be a debtor under chapter 13 of this title.

Based on this Code section, if a debtor has more than $383,175 in noncontingent (i.e., doesn’t depend on a triggering event for its validity), liquidated (i.e., the dollar amount of the debt is certain), unsecured (i.e., there is no collateral securing the debt) debt, then Chapter 13 is unavailable.

Since Chapter 7 has no debt ceilings (though it does have income ceilings, which can be made precise using 11 U.S.C. § 707(b)), the debtor can first do a Chapter 7 to get rid of as much unsecured debt as possible, and then do a Chapter 13 to deal with debts that weren’t discharged in the prior Chapter 7, or to catch up on a delinquent mortgage.
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tax return with hundred dollar billsSome time ago I wrote about discharging income taxes in bankruptcy.  I subsequently wrote about discharging income taxes in bankruptcy for a tax year in which the debtor filed a return after the taxing authority ― for simplicity I will generically label the authority as the IRS, though the discussion applies to other taxing authorities ― filed a substitute for return and assessed the tax.

A fellow bankruptcy attorney of the highest caliber, who is also a good friend, read the substitution for return post ― Yippee!  I always love hearing that people are reading the blog ― and drew my attention to a brand new decision of the Bankruptcy Appellate Panel for the Ninth Circuit (the “BAP”) in the appeal of one of the cases I discussed in substitute for return post.  He suggested that I write a follow up post.  Following the rule always to take requests from the audience (please try the veal piccata, and be sure to tip the wait staff), I offer the following update.

To set the stage for this post I will begin with a précis of the aforementioned (does anyone other than an attorney use the word “aforementioned”?) two previous posts.  If you want more detail, read those two posts.

I.  The Three-Part Tax Dischargeability Test

For a tax to be dischargeable in bankruptcy, it must satisfy three requirements:

1.  (The three-year rule) The tax return for the tax year in question must have been due (including extensions) – but not necessarily actually filed – at least three years before the filing of the bankruptcy papers,

2.  (The two-year rule) The debtor must have actually filed a legitimate, nonfraudulent tax return for that tax year at least two years before the filing of the bankruptcy papers, and

3.  (The 240-day rule) The taxing authority cannot have assessed the tax during the 240 days prior to filing the bankruptcy papers.

The second requirement, the so-called two-year rule, has been the subject of extensive litigation throughout the country, with a wide range of inconsistent outcomes.  It is the afflatus for this post.
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IRS From 1040Some time ago I wrote about discharging income taxes in bankruptcy.  I stated that there is a three-part test for determining their dischargeability, and started with the following executive summary:

For a tax to be dischargeable in bankruptcy, it must satisfy three requirements:

  1. (The three-year rule) The tax return for the tax year in question must have been due (including extensions) – but not necessarily actually filed – at least three years before the filing of the bankruptcy papers,
  2. (The two-year rule) The debtor must have actually filed a legitimate, nonfraudulent tax return for that tax year at least two years before the filing of the bankruptcy papers, and
  3. (The 240-day rule) The taxing authority cannot have assessed the tax during the 240 days prior to filing the bankruptcy papers.

The second requirement, the so-called two-year rule, has been the subject of extensive litigation throughout the country, with a wide range of inconsistent outcomes.  Therefore, I suspect that the Supremes will eventually be asked to consider the matter.

My focus today is on what happens if the taxing authority files something called a substitute for return on behalf of the debtor/taxpayer.  For linguistic simplicity, I will refer to the taxing authority as the IRS, though the discussion applies, mutatis mutandis, if the taxing authority is a state taxing authority such as California’s Franchise Tax Board.
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In 2013 the U.S. Supreme Court handed down an opinion that shed light on the meaning of the word “defalcation” as it is used in the Bankruptcy Code’s list of nondischargeable debts.  The opinion disabuses of their error those who thought the word had something to do with a bathroom bodily function.  In this post we will look at the Supremes’ decision in the larger context of nondischargeability under 11 U.S.C. § 523(a)(4).

I.  Nondischargeable Debts In A Personal Bankruptcy:  Section 523(a)(4)

As readers of this blog know, 11 U.S.C. § 523(a) contains the exceptions to discharge in Chapter 7, 11, 12, and 11 U.S.C. § 1328(b) hardship discharge Chapter 13 bankruptcies.  Included in that list is the following:

A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt— . . . for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.

11 U.S.C. § 523(a)(4).

The list of debts that are nondischargeable in a completed Chapter 13 plan discharge ― found in 11 U.S.C. § 1328(a) ― is shorter than the list of exceptions to discharge found in 11 U.S.C. § 523(a).  However, § 1328(a) includes § 523(a)(4) by reference, so a debt incurred through “fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny” is never dischargeable in any personal bankruptcy.

However, § 523(a)(4) is not self-executing.  According to 11 U.S.C. § 523(c)(1):

[T]he debtor shall be discharged from a debt of a kind specified in paragraph (2), (4), or (6) of subsection (a) of this section, unless, on request of the creditor to whom such debt is owed, and after notice and a hearing, the court determines such debt to be excepted from discharge under paragraph (2), (4), or (6), as the case may be, of subsection (a) of this section.

Thus, the creditor can only make the debt survive the bankruptcy discharge by successfully prosecuting a special kind of lawsuit in the Bankruptcy Court.  That kind of lawsuit is called an adversary proceeding.
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Is a debt incurred as a result of a DUI (or DWI depending on the argot used where you live) dischargeable in bankruptcy?  There are three parts to the answer.  Although my discussion makes use of California and Ninth Circuit law, its substance will undoubtedly apply, mutatis mutandis, to any jurisdiction in the United States.

I.   A DUI Fine Is Not A Dischargeable Debt

If a debtor tied one on, got behind the wheel, and received a citation for drunk driving, the resultant fine is not dischargeable in bankruptcy.  To establish this requires a two-step analysis.

A.  Bankruptcy Other Than In A Completed Chapter 13 Plan

11 U.S.C. § 523(a) contains the exceptions to discharge in Chapter 7, 11, 12, and 11 U.S.C. § 1328(b) hardship discharge Chapter 13 bankruptcies.  Included in that list is the following:

A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt— . . . to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit . . .

11 U.S.C. § 523(a)(7) (emphasis added).

 

B.  A Completed Chapter 13 Plan Discharge

The list of debts that are nondischargeable in a completed Chapter 13 plan discharge ― found in 11 U.S.C. § 1328(a) ― is shorter than the list of exceptions to discharge found in 11 U.S.C. § 523(a).  In particular, § 523(a)(7) is not included in the Chapter 13 list.  However, 11 U.S.C. § 1328(a)(3) excludes from discharge (emphasis added):  “any debt— . . . for restitution, or a criminal fine, included in a sentence on the debtor’s conviction of a crime . . .”

Is a DUI a crime?  Yes.  Here is the reasoning:
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Chapter 13 bankruptcy has an important limitation.  If the debtor’s debts are too large, Chapter 13 is unavailable:

Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525, or an individual with regular income and such individual’s spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $383,175  and noncontingent, liquidated, secured debts of less than $1,149,525 may be a debtor under chapter 13 of this title.

11 U.S.C. § 109(e).

By the way, the numbers at the Cornell Law School site to which this links haven’t been updated for some time.  I corrected them in the quote above.  The modified quote is correct as of September 2014.

If either debt ceiling — either the secured, or unsecured — is exceeded, the debtor is ineligible for Chapter 13 protection, and must consider Chapter 11 bankruptcy.  This leads to the following question that was posed by a fellow bankruptcy attorney:

Question:

Suppose a debtor has a mortgage — for simplicity let’s say a first mortgage — that is undersecured, i.e., the value of the house is less than the current balance on the mortgage.  Does the unsecured portion of the mortgage count toward the $383,175 unsecured debt ceiling?

My answer was:  It depends on whether or not the house is the debtor’s principal residence.  But it’s a bit more complicated than you might imagine.  Let’s start with the simpler “nonprincipal residence” scenario.
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A fellow bankruptcy attorney recently posed an interesting question regarding a threatened foreclosure sale before the automatic stay is lifted in a Chapter 13 bankruptcy.  Here is the exchange I had with her:

Question:

            Background Facts:

I just got an email from a Chapter 13 client who has a confirmation hearing on 8/21.  She told me that auction.com just came by her house and posted a sign that her house is up for auction on 8/14.  There has been no relief from the automatic stay issued in this case, nor has a motion for relief from the automatic stay been filed.  When we filed the case in March, we stopped a foreclosure action and the client was going to try to save her home so we put the arrears and some IRS tax debt in the plan.  Her original confirmation hearing was on 6/21 but the Chapter 13 Trustee’s office continued it to 8/21.  In the interim she lost one of her jobs and decided that she would just surrender the home and pay the priority tax debt in the plan.  We amended the plan indicating that she would be surrendering the home, but no arrangements have been made yet on the terms of the surrender.

            The Question:

Doesn’t the bank still need relief from the automatic stay to auction the house?

My Answer:

I.          The Terms Of The Confirmed Plan Will Bind The Debtor

The Bankruptcy Code provides:  “[T]he court shall confirm a plan if — . . .  [for an] allowed secured claim provided for by the plan — . . . the debtor surrenders the property securing such claim to such holder . . .”  11 U.S.C. § 1325(a)(5)(c).  Thus, your client is entitled to propose a plan in which she surrenders her home to the creditor holding the first mortgage.  Once the Court confirms the plan, its provisions will “bind the debtor . . .”  11 U.S.C. § 1327(a), meaning that she will have to surrender the home.
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Credit bureauMany of my clients express concern over their ability to obtain credit and take out loans after they have gone through a bankruptcy.  I have written in great detail about the topic, and included tips on rebuilding credit after bankruptcy, so I won’t rehash it here.

Instead, I suggest that if you have gone through a bankruptcy, and are in the process of using my tips for rebuilding credit, you get your credit reports each year and review them for errors.  You can do so at http://www.annualcreditreport.com/.

When you go to the site, focus on the credit reports rather than on any ads that may pop up.  After all, the point is to see what’s going on with your credit, not to purchase goods and services you probably don’t need.

As you review the reports, keep in mind that the reporting bureaus rely on your creditors, and not on you, for their information.  Therefore, if a creditor has sent erroneous data the report will contain errors.  These errors can be fixed.
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