I recently answered a question posed by a fellow bankruptcy attorney, and thought you might find the discussion interesting.

Here’s an edited version of my colleague’s question:

A Chapter 7 debtor who is a real estate broker had some listings prepetition.  He opened escrow postpetition, and eventually sold the properties.  He received a $20,000 commission, none of which can be exempted.  The Trustee has demanded all the commission received.  What can be done?

Here’s my response:

Three cases that help to answer the question from different vantage points are: In re Fit zsimmons, 725 F. 2d 1208 (9th Cir. 1984), In re Ryerson, 739 F. 2d 1423 (9th Cir. 1984), and In re Wu, 173 B.R. 411 (B.A.P. 9th Cir. 1994).

I.    The Key Statutory Provision

According to 11 U.S.C. § 541(a), when a debtor files for bankruptcy protection, the act of filing the papers “creates an estate.”    The prepetition debts then become postpetition claims against that estate.

In a Chapter 7 bankruptcy, the Chapter 7 Trustee liquidates the estate to produce a dividend to the debtor’s creditors.  The debtor can exclude assets from that estate by appealing to an appropriate exemption table (Cal. Civ. Proc. Code § 704 for homeowners with equity in their principal residence, and Cal. Civ. Proc. Code § 703.140 for everyone else).  Anything the debtor cannot exempt is fair game for the Trustee to seize.

What goes into the estate?  The gist of 11 U.S.C. § 541(a) is that everything the debtor owns or has an interest in on the day of filing the bankruptcy papers, anything the debtor becomes entitled to through bequest, inheritance, devise, or through life insurance proceeds during the 180 days after the petition day, and anything that is the fruit of estate assets (e.g., interest earned on an estate asset) is part of the estate.

But § 541(a)(6) has a carve-out for income earned by the debtor for services rendered postpetition.  It is this provision that is at the heart of the answer to my colleague’s question.
Continue Reading

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

In my last post, I discussed retirement contributions within the Chapter 7 context.  Our attention now turns to retirement contributions in a Chapter 13 bankruptcy.

II.        Retirement Contributions In A Chapter 13 Bankruptcy

In discussing Chapter 7, I referred to Form 22A.  The Chapter 13 analogue is Form 22C, which is very similar to Form 22A; but there are some differences.

One difference is Form 22C’s line 55, which permits a debtor to list “Qualified retirement deductions.”  There is no analogue to Form 22C’s line 55 in Form 22A.  This indicates that the Commission that created Form 22 (Form 22A for Chapter 7, Form 22B for Chapter 11, and Form 22C for Chapter 13) believed that Congress wanted Chapter 13 debtors, but not Chapter 7 debtors, to able to contribute to their retirement —presumably to “encourage” debtors to go into Chapter 13, so that their creditors would receive something through the Chapter 13 plan.

Why did the Commission include line 55 in Form 22C?  The best explanation is found in 11 U.S.C. § 541(b)(7).  A little background will help to understand that statutory subsection and its application to the creation of Form 22C.
Continue Reading

The answer differs depending on the nature of the debt and under which chapter the bankruptcy case was filed.

I.          The Key Exception To Discharge

The key provision of the Bankruptcy Code that we use to answer the question is 11 U.S.C. § 523(a)(3), which states (with emphasis added):

A dischargeunder section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt— . . . neither listed nor scheduled under section 521 (a)(1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit

(A) if such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the case in time for such timely filing; or

(B) if such debt is of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim and timely request for a determination of dischargeability of such debt under one of such paragraphs, unless such creditor had notice or actual knowledge of the case in time for such timely filing and request;

If you’re not used to reading statutory language you may naturally ask:  What does all of this mean?  One thing is clear:  this statutory provision concerns debts that were “neither listed nor scheduled” in the bankruptcy papers “in time to permit . . .”  But to permit what?  There are two things that the creditor would have been able to do in a timely fashion if the debt had been properly scheduled, but cannot because of the oversight.
Continue Reading

In bankruptcy you can protect your retirement accounts if they are ERISA-qualified:  things like 401(k)s, 403(b)s, and pension plans, or IRAs (IRAs are not ERISA-qualified, but they are still protected due to the U.S. Supreme Court opinion in Rousey v. Jacoway, 544 U.S. 320 (2005).  By this I mean that they are protected from the depredations of bankruptcy trustees, and hence from the claims of creditors, because they can be exempted using the appropriate exemption table.  In a previous blog I discussed the exemption process in great detail.  As long as you hire a high-quality attorney you should be able to keep all of your retirement.  In sum, if you file for bankruptcy protection your retirement accounts will not be in jeopardy – at least not because of your bankruptcy.

But what about the underlying solvency of your retirement accounts?  How sure are you about the stability of the accounts themselves?  Is your retirement plan one of the many that invest in municipal, state, and federal bonds?  If so, do you know how safe these investment vehicles are?
Continue Reading