I am regularly asked what happens when a Chapter 7 Trustee sells a debtor’s asset in a bankruptcy.  This post answers that question.

 

I.      Business Chapter 7

 

If a business files for Chapter 7 bankruptcy protection, the Chapter 7 Trustee assigned to the case seizes all of the business’s assets and liquidates them.  As part of the liquidation the Trustee pays off all encumbrances against the assets — e.g., mortgages against real property — pays the cost of selling the assets, takes the statutory cut found in 11 U.S.C. § 326(a), and distributes the remaining proceeds to the creditors according to the priority rules found in 11 U.S.C. §§ 507(a) and 726(a).

When the smoke all clears the debtor ceases to exist, which is why a business is ineligible for a Chapter 7 discharge pursuant to 11 U.S.C. § 727(a)(1).

 

II.     Personal Chapter 7

 

I am pleased to report that although the title of Chapter 7 in the Bankruptcy Code is “Liquidation,” no individual debtors are liquidated in a Chapter 7 bankruptcy.  However, there can be a liquidation component to the case.

 

A.  Exempting Assets

 

I have already written about exempting assets many times — see, e.g., the September 16, 2011 post.  Therefore, I won’t discuss that topic here; other than to say that in a personal Chapter 7 bankruptcy the debtor keeps the exempt assets, while the Chapter 7 Trustee seizes and liquidates the nonexempt assets for the benefit of creditors.

 

B.  The Liquidation

 

When faced with a nonexempt asset, a Trustee must answer a question:  Is it worth the time, effort, and expense to do the liquidation?  Here is the analysis the Trustee will do:

1.  How much is the asset worth?

Although the debtor provides an estimated value in the bankruptcy papers, this estimate does not bind the Trustee — even if the estimate was a professional appraisal of the property.  The only way to really determine the value of the asset is to put it on the market because an asset is only worth what the market will pay for it.  Of course, a professional appraisal may dissuade the Trustee from taking further action because the appraisal may indicate the futility of selling the asset due to the required payout discussed below. Continue Reading Liquidation Of An Asset In A Chapter 7 Bankruptcy

 

A fellow bankruptcy attorney recently posed an interesting question regarding the dischargeability of an obligation to pay workers compensation insurance premiums.  Here is the exchange I had with him:

Question:

Is money owed to the “State Fund” for unpaid workers compensation insurance premiums by a debtor as a responsible officer of a defunct corporation nondischargeable?

My Answer:

You may find the Ninth Circuit’s decision in In re George, 361 F. 3d 1157 (9th Cir. 2004) helpful.  The background facts were:

Owen and Deborah George petitioned for bankruptcy under Chapter 7 on October 20, 1998, and obtained a discharge from debt on January 4, 1999. A year later, on February 7, 2000, they were found liable on a debt for $116,000.  The debt arose because they had failed to cover an employee injury by purchasing workers’ compensation insurance or meeting state requirements for self-insurance, as required by law.  The Trust Fund filed a lien against the Georges’ real property. The Georges filed a complaint in their bankruptcy case to establish that the debt had been discharged and to avoid the lien. The Bankruptcy Court held that the Trust Fund’s claim was not an “excise tax,” so the debt was discharged and the lien was void.  The Trust Fund appealed, and the District Court reversed. The Georges appeal.

In re George, 361 F. 3d at 1158.

The Court reversed the District Court holding that the unpaid Workers Compensation premiums were not an excise tax, and the liability was therefore dischargeable.

Perhaps your client’s failure to pay the premiums could be characterized as a failure to purchase workers compensation insurance, thus making the George holding apposite to their case.

In sum, a debt incurred from failure to pay workers compensation premiums should be dischargeable in the Ninth Circuit.

 

Image courtesy of Flickr (Licensed) by David Hilowitz

 

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. Continue Reading Post-Bankruptcy Credit Reports

Cartoon of man with billA very recent Eleventh Circuit decision, Crawford v. LVNV Funding, LLC, No. 13-12389 (11th Cir., July 10, 2014), highlights an interesting split among the circuits, which makes things ripe for an appeal to the Supremes.

First let’s get a little background.

BACKGROUND

I.                The Automatic Stay And The Discharge Injunction

When a person files for bankruptcy protection, the automatic stay is triggered.  The stay prevents creditors from taking action against the debtor, the debtor’s possessions, and the bankruptcy estate that is created upon filing.  I have written about the automatic stay in many previous posts, so I won’t spend a lot of time exploring it here.

[T]he stay . . . continues until the earliest of —

(A) the time the case is closed;

(B) the time the case is dismissed; or

(C) if the case is a case under chapter 7 of this title concerning an individual or a case under chapter 9, 11, 12, or 13 of this title, the time a discharge is granted or denied.

11 U.S.C. § 362(c) (2).

If the debtor receives a discharge, then once the stay terminates it is replaced by the permanent discharge injunction of 11 U.S.C.  § 524(a), that forever prohibits creditors from attempting to collect discharged debts.

 

II.              The Fair Debt Collection Practices Act

The Bankruptcy Code is federal law, made pursuant to Congress’s enumerated power “to establish . . . uniform Laws on the subject of Bankruptcies throughout the United States.”  U.S. Const. art. I, § 8, cl. 4.  It affords debtors marvelous protections — including the automatic stay and the discharge injunction — against the depredations of their creditors.

Another federal law that protects debtors, in this case from debt collectors, is the Fair Debt Collection Practices Act (“FDCPA”) found in 15 U.S. Code § 1692, et seq.  The FDCPA contains significant limitations on what a debt collector can do.  By the way, the limitations here are not on the creditor, just on the collector.

 

III.            The Doctrine Of Federal Preemption

The U.S. Constitution contains the following provision:

This Constitution, and the Laws of the United States which shall be made in Pursuance thereof . . . shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.

U.S. Const., art. VI, para. 2.

This means that federal laws are binding on everyone.  Thus, if there is a conflict between a federal statute and a state statute, the federal statute always wins.  This is sometimes referred to as the doctrine of federal preemption.

But notice what the Constitution does not say.  It does not say anything about the relationship between two federal statutes.  Therefore, if there were an inconsistency between two federal statutes, there is no formula for determining which statute controls.  And if there were no conflict between two federal statutes, there is no indication that one should be preferred above the other.

 

IV.            The Ninth Circuit’s Walls Decision

In 2002 the U.S. Court of Appeals for the Ninth Circuit issued a decision in Walls v. Wells Fargo Bank, N.A., 276 F. 3d 502 (9th Cir. 2002), that has created a problem for Ninth Circuit practitioners. Continue Reading Fair Debt Collection Practices Act And Bankruptcy

Home equityLast Sunday, July 20, 2014, Liz Weston of the L.A. Times gave an interesting answer to a question posed by a reader of the newspaper’s Money Talk feature.  Today’s post adds to Liz’s advice.

The reader had accumulated $28,000 in credit card debt over the previous eight years, and had considerable law school debt and a home mortgage.  He wanted to know whether a home equity loan was a smart choice to solve his problems.

Liz gave a good answer, but the LA Times’ space constraints made it impossible for her to cover things in detail.  Her response included the statement:  “Bankruptcy probably isn’t in the cards for you, of course, given your resources.”  This led me to today’s post.

But first, a caveat:  In order to give the reader an accurate analysis of the application of bankruptcy to his problems, I would need a lot more information.  Thus, what I am about to say focuses on general principles, and is not a substitute for a thorough evaluation of the case using detailed documentation.

 

I.              Chapter 7 Bankruptcy

I suspect that Liz had Chapter 7 bankruptcy in mind when she made her comment.

In a Chapter 7 bankruptcy, the debtor’s dischargeable debts are discharged without the creditors getting anything.  Since this is such a big hit on the creditors, there are some limitations.  One such limitation is on what the debtor gets to keep.  The debtor keeps exempt assets,  but the Chapter 7 Trustee assigned to the case seizes and liquidates the nonexempt assets for the benefit of the creditors.

Given that the reader has enough equity that he was considering a home equity line of credit (“HELOC”), it may be that he has too much equity to fully exempt.  If that is the case, then a Chapter 7 bankruptcy might be a poor choice since he and his wife would lose their home to the depredations of the Chapter 7 Trustee assigned to the case.  Again, more detailed information about his assets and encumbrances against them are needed to say for sure.

However, two other chapters of the Bankruptcy Code may be worth considering because debtors filing bankruptcies under those chapters can keep their assets regardless of their value or exempt status. Continue Reading Comment On Liz Weston’s Column: Chapter 13 Bankruptcy Is An Option

Multiple clocksI recently had an email exchange regarding statute of limitations tolling in bankruptcy, with a friend who is a fellow bankruptcy attorney.  My friend posed a couple of questions based on an interesting fact pattern.  Herewith I offer a slightly edited version of the exchange.

First, here is my friend’s email:

Salient Facts:   Chapter 7 case filed.  Debtor has some accounts receivable.   On the petition filing date, there are 4 months left on the Statue of Limitations to bring an action on the accounts receivable.  The Chapter 7 Trustee sold the accounts receivable to someone we’ll call, Doug.

Questions:

1.  How long does Doug have to bring suit on the accounts receivable he purchased from the Trustee?

2.  Section 108(a) gives the Trustee 2 years from the petition date to commence an action.  It also seems to extend the statute of limitations by some period, which I used to assume was the pendency of the bankruptcy case, ending when it closed.  But now that I read the language, it is not at all clear.  Section 108(a)(1) has the statement:  “[I]ncluding any suspension of such period occurring after the commencement of the case…”; What the heck does that mean?  Does there need to be a formal suspension, or is it automatic, and if so, for how long?

Before I give you my response, here is some helpful background.

 

I.              Statutes Of Limitations

At the risk of gross oversimplification, we can think of noncriminal law as a mechanism for resolving competing interests.  In particular, litigation is the means we use for resolving disputes without the parties resorting to duels.  If only Aaron Burr had resolved his dispute with Alexander Hamilton through litigation.

One of the goals in this process is to resolve disputes in a reasonably timely fashion, before the witnesses’ memories become distorted with the passage of time.  Therefore, the statutes under which plaintiffs bring their suits contain time windows during which the actions must be initiated.  If a plaintiff fails to take action within the relevant time window, the suit is time-barred.  The plaintiff is said to have “slept on his rights.” Continue Reading Tolling A Statute Of Limitations In Bankruptcy

HomeIf you sell your home, can the cash proceeds be exempted using the homeowner’s equity exemption?  That was the subject of two questions that a fellow bankruptcy attorney recently asked me.  I found the exchange interesting, so I am posting it for your edification.

Question 1:

If the proceeds from the sale of the domicile are held in escrow or my client trust account — and the Debtor is required to seek further court approval before being allowed to touch them, would that mean the Debtor never “actually received” them in the sense of Cal. Civ. Proc. Code § 704.720, so that the statutory time did not begin to run?

I.          Exempt Status If Debtor Did Not Have Immediate Access To The Proceeds

We first turn to the statute (with emphasis added):

If a homestead is sold . . . the proceeds of sale . . . are exempt in the amount of the homestead exemption provided in Section 704.730.  The proceeds are exempt for a period of six months after the time the proceeds are actually received by the judgment debtor, except that, if a homestead exemption is applied to other property of the judgment debtor or the judgment debtor’s spouse during that period, the proceeds thereafter are not exempt.

Cal. Civ. Proc. Code § 704.720(b).

Based on this language, the California Supreme Court’s holding in Thorsby v. Babcock, 36 Cal. 2d 202 (Cal. 1950) answers the question.

Babcock was the judgment debtor in this case, and Thorsby was the judgment creditor.  Babcock sold his home on which he had a homestead exemption.  However, due to the litigation with Thorsby the sale proceeds were placed in an escrow account for eight months.  Thus, Babcock didn’t have access to the sale proceeds for eight months, so he couldn’t reinvest the proceeds in a new domicile during the six-month postsale period.  Thorsby challenged the legitimacy of the exemption based on the fact that the proceeds hadn’t been reinvested in a domicile during the six-month postsale period. Continue Reading Homestead Exemption After Sale Of The Residence

IRACan I exempt the IRA I inherited from my father when he died?

This, in essence, is the question the U.S. Supreme Court very recently addressed in Clark v. RAMEKER, No. 13-299 (U.S. June 12, 2014).

I.          Exempting Retirement Funds

I have discussed exemptions in many previous posts.

In one post I covered exempting non-ERISA-qualified retirement plans such as IRAs.  I pointed out that in Rousey v. Jacoway, 544 U.S. 320 (2005) the Supreme Court held that IRAs were exemptible because they had characteristics that were similar to ERISA-qualified plans such as 401(k)s.  I then stated that if a debtor had a non-ERISA-qualified retirement plan, then depending on the nature of the account, the debtor (i.e., the debtor’s counsel) could appeal to Rousey’s reasoning to argue by analogy that the accounts are ERISA-like and then appeal to Rousey’s holding to exempt them.

The above discussion applies nicely to retirement plans that debtors set up for themselves.  But an inherited IRA is one that was set up by someone other than the debtor, for that person’s benefit, and not for the debtor’s benefit.  The funds did not belong to the heir when they were contributed to the plan.  In that situation the Supremes in Clark held that Rousey’s reasoning is inapposite.

In Clark the Supremes held that an inherited IRA could NOT be exempted using a retirement exemption.  In its unanimous decision the Court held:

The text and purpose of the Bankruptcy Code make clear that funds held in inherited IRAs are not “retirement funds” within the meaning of §522(b)(3)(C)’s bankruptcy exemption.

Clark v. RAMEKER at section II.  (The case is so recent that page numbers have not yet been included.)

Therefore, if you have an inherited IRA that cannot be exempted using something other than a retirement exemption, you need to hire an extremely knowledgeable and highly skilled bankruptcy attorney to determine whether bankruptcy even makes sense for you, and to discuss careful prebankruptcy planning if bankruptcy is necessary.

 

 Image courtesy of Flickr (Licensed) by Simon Cunningham

small pile of penniesHere is the eighth defense against preference avoidance actions, the so-called de minimis transfer defense.  This defense has two versions.

Defenses To Preference Avoidance Actions, Part VIII:

The De Minimis Transfer Defense

A.        The De Minimis Transfer Defense, Part I

Suppose an individual with primarily consumer debt files a personal bankruptcy.  And suppose that debtor had $400 garnished during the ninety-day prepetition period.  Is it worth the Court’s time to entertain an adversary proceeding to avoid the garnishment pursuant to § 522(h)?  Congress answered that question in the negative by including § 547(c)(8):

The trustee may not avoid under this section a transfer — . . . if, in a case filed by an individual debtor whose debts are primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $600.

Of course, in practical terms even $600 is too small an amount to justify the filing of a § 522(h) adversary proceeding.  The dollar amount warranting the action cannot be made precise.  A bankruptcy attorney with a client who can exempt wages that were garnished during the prepetition preference period and wants to avoid the garnishment using § 522(h), you will need to explain the costs associated with the action prior to committing to the representation.

B.        The De Minimis Transfer Defense, Part II

For cases in which the debtor’s debts are not primarily consumer debts, Congress included a larger de minimis cut-off:

The trustee may not avoid under this section a transfer — . . . if, in a case filed by a debtor whose debts are not primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $6,225.

You might be tempted to conclude that if the debtor’s debts are not primarily consumer debts, they must be business debts.  While that is undoubtedly true in many cases, an individual debtor without a business can file a personal bankruptcy in which the debts are not primarily consumer debts.

This frequently happens when the debts are primarily — i.e., more than 50% of the total debt — tax obligations.  See, e.g., In re Westberry, 215 F.3d 589, 591 (6th Cir. 2000)

Almost without exception, the bankruptcy courts that have addressed this question have determined that tax debt should not be considered consumer debt for purposes of the codebtor stay.  See, e.g., In re Stovall, 209 B.R. 849, 854 (Bankr.E.D.Va.1997); In re Dye, 190 B.R. 566, 567 (Bankr. N.D. Ill. 1995); In re Marshalek, 158 B.R. 704, 706 (Bankr. N.D. Ohio 1993); In re Greene, 157 B.R. 496, 497 (Bankr. S.D. Ga. 1993); Goldsby v. United States (In re Goldsby), 135 B.R. 611, 613-15 (Bankr. E.D. Ark. 1992); In re Reiter, 126 B.R. 961 (Bankr. W.D. Texas 1991); Harrison v. Internal Revenue Service (In re Harrison), 82 B.R. 557, 558 (Bankr. D. Colo. 1987); Pressimone v. Internal Revenue Service ( In re Pressimone ), 39 B.R. 240, 244 (N.D. N.Y. 1984).  We find the weight of these opinions and their reasoning persuasive.

Of course, the debtor may have consumer debts as well.  In such a case, the debtor will have to have had quite a bit garnished during the prepetition preference period to warrant filing a § 522(h) adversary proceeding.

If you’re facing a preference avoidance action, and need an analysis of your case and the possible application of the de minimis transfer defense to your case, contact a California board certified bankruptcy law specialist to help you.

 

Image courtesy of Flickr (Licensed) by John H Kleschinsky

 

 

Here is the sixth defense against preference avoidance actions, the so-called domestic support defense.  This one is short.

Defenses To Preference Avoidance Actions, Part VII:

The Domestic Support Defense

A comparison of the Bankruptcy Code prior to October 17, 2005 with its current incarnation (the 2005 law that changed the Code is the Bankruptcy Abuse And Consumer Protection Act — “BAPCPA,” or as it sometimes less charitably called, BAPCraPA) reveals that Congress intended to strengthen the Code’s protection of recipients of domestic support.  “Domestic support” is defined in § 101(14A).  The definition is long so I will not repeat it here.  The gist is that it includes alimony and child support, and must be owed to a spouse, former spouse, or child of the debtor, or a governmental unit.

The changes to § 547(c)(7) reflect this intent.  The new version is stripped of the former version’s qualifying language, and simply states:  “The trustee may not avoid under this section a transfer — . . . to the extent such transfer was a bona fide payment of a debt for a domestic support obligation.”

The inclusion of the qualifier, “bona fide” indicates that Congress took into consideration payments that might superficially be characterized as domestic support, but were something else entirely.  See In re Futoran, 76 F.3d 265 (9th Cir. 1996) (payment of future spousal support in exchange for termination of marital agreement held to be an avoidable preference).

However, given the paucity of case law on § 547(c)(7), it appears that trustees and DIPs don’t think it is worth the effort to attempt to avoid transfers that look like domestic support.

If you’re facing a preference avoidance action, and need an analysis of your case and the possible application of the domestic support defense to your case, contact a California board certified bankruptcy law specialist to help you.

 

Image courtesy of Flickr (Licensed) by vastateparksstaff