On October 31, 2013, the appellate court for this region issued an important opinion concerning what is called "after acquired property." For some time, the status of "after acquired property" has been in limbo. The Bankruptcy Code treats chapter 7s and 13s differently. While it is clear that assets from property settlement agreements and inheritances acquired within 180 days of the bankruptcy petition are part of the bankruptcy estate for chapter 7 purposes, the status of such property was not clearly defined under chapter 13 proceedings. Afterall, a chapter 13 bankruptcy lasts for 36 to 60 months. The specific issue before the Court concerned an inheritance received by a chapter 13 debtor after month 6 but before the completion of his plan payments. The Debtor did not disclose the inheritance to the chapter 13 trustee, and the latter sought the monetary value of the inheritance on behalf of the bankruptcy estate. The Court of Appeals for the Fourth Circuit held that property acquired after 6 months but before the completion of the plan is part of the bankruptcy estate. More importantly, some of the language employed by the Court in its opinion is very expansive. In essense any windfall to the chapter 13 debtor or any large salary increase ought to be disclosed to the chapter 13 trustee seasonably. The Fourth Circuit states that a chapter 13 bankruptcy is very advantageous to the debtor and that the debtor ought to pay his creditors if he can do so. The Code language will be interpreted accordingly.
This blog is not intended to render legal services to the reader, including advice about bankruptcy or taxes. Consult with a lawyer concerning the specific application of the law to your unique circumstance.
Thursday, March 6, 2014
Saturday, January 7, 2012
STOP WAGE AND BANK GARNISHMENTS!
Stop Wage and Bank Account Garnishments!
When a judgment creditor collects a debt, it may use state law procedures called a garnishment to collect. The garnishment directs the co-defendant, the employer or bank, to withhold money or property that belongs to you. If the co-defendant fails to comply, it can be charged to pay the judgment against you. Therefore, all banks and employers attempt to comply with the garnishment. Usually a garnishment has a return date. It directs the sheriff to levy the judgment against the co-defendant and you. Both you and the co-defendant have the chance to appear in court on the return date. The creditor's rights to the money collected attaches as soon as the co-defendant is served with the garnishment. This is important because even if you stop the garnishment by filing bankruptcy, YOU MUST PROTECT THE FUNDS ALREADY TAKEN UNDER THE GARNISHMENT.
Bankruptcy filing will stop garnishment.
A bankruptcy filing will stop a garnishment on the date the bankruptcy proceeding is filed. However, you will need to contact your pay-roll department to prevent the wage withholding from occurring. Sometimes, employers will require an release of the garnishment or evidence that a suggestion in bankuptcy was filed with the court that issued the garnishment.
Protecting funds garnished.
There are limits on garnishments established under state and federal laws:
Virginia law limits garnishment from your paycheck(s) to twenty-five percent (25%) of your "disposable earnings." This is your pay minus required deductions, like state and federal taxes and Social Security withholdings. A higher percentage of your wages may be withheld in the event of a child support obligation.
Other income sources that can't be garnished include:
Social Security benefits
Retirement plan benefits
Public assistance benefits
And, unless the judgment is for child or spousal support, your income can't be garnished if it comes from:
Workers' compensation awards
Unemployment or disability benefits
Must file homestead deed.
There are also specific exemptions provided by the Virginia law, which are asserted under a homestead deed. Under Virginia homestead law sec. 34-4, $5,000 in cash for you and an additional $500 for child dependent upon you may be protected from your creditor by filing a homestead deed in the locality in which your live. The homestead deed should be filed before the meeting of your creditors (the event in bankruptcy where you appear to answer questions about your assets and financial affairs) if it is obvious that the creditor will otherwise take the money. There is much pressure in a bankruptcy proceeding to get the homestead deed filed because under state law it must be filed within 5 days of the meeting of the creditors.
This blog is not intended to render legal services to the reader, including advice about bankruptcy or taxes. Consult with a lawyer concerning the specific application of the law to your unique circumstance.
When a judgment creditor collects a debt, it may use state law procedures called a garnishment to collect. The garnishment directs the co-defendant, the employer or bank, to withhold money or property that belongs to you. If the co-defendant fails to comply, it can be charged to pay the judgment against you. Therefore, all banks and employers attempt to comply with the garnishment. Usually a garnishment has a return date. It directs the sheriff to levy the judgment against the co-defendant and you. Both you and the co-defendant have the chance to appear in court on the return date. The creditor's rights to the money collected attaches as soon as the co-defendant is served with the garnishment. This is important because even if you stop the garnishment by filing bankruptcy, YOU MUST PROTECT THE FUNDS ALREADY TAKEN UNDER THE GARNISHMENT.
Bankruptcy filing will stop garnishment.
A bankruptcy filing will stop a garnishment on the date the bankruptcy proceeding is filed. However, you will need to contact your pay-roll department to prevent the wage withholding from occurring. Sometimes, employers will require an release of the garnishment or evidence that a suggestion in bankuptcy was filed with the court that issued the garnishment.
Protecting funds garnished.
There are limits on garnishments established under state and federal laws:
Virginia law limits garnishment from your paycheck(s) to twenty-five percent (25%) of your "disposable earnings." This is your pay minus required deductions, like state and federal taxes and Social Security withholdings. A higher percentage of your wages may be withheld in the event of a child support obligation.
Other income sources that can't be garnished include:
Social Security benefits
Retirement plan benefits
Public assistance benefits
And, unless the judgment is for child or spousal support, your income can't be garnished if it comes from:
Workers' compensation awards
Unemployment or disability benefits
Must file homestead deed.
There are also specific exemptions provided by the Virginia law, which are asserted under a homestead deed. Under Virginia homestead law sec. 34-4, $5,000 in cash for you and an additional $500 for child dependent upon you may be protected from your creditor by filing a homestead deed in the locality in which your live. The homestead deed should be filed before the meeting of your creditors (the event in bankruptcy where you appear to answer questions about your assets and financial affairs) if it is obvious that the creditor will otherwise take the money. There is much pressure in a bankruptcy proceeding to get the homestead deed filed because under state law it must be filed within 5 days of the meeting of the creditors.
This blog is not intended to render legal services to the reader, including advice about bankruptcy or taxes. Consult with a lawyer concerning the specific application of the law to your unique circumstance.
Thursday, December 29, 2011
A TALE OF TWO HOUSES
Recently I had to defend a motion to dismiss a chapter 7 bankruptcy filing, which motion was brought by the office of United States trustee. A private lender had lent $100,000 to the debtor. The debtor was a contractor who had fallen on hard times due to a collapse of the new home construction market. The debtor lived in a million-dollar mansion, which he had used as a model home for his business. The private lender had a single-family residence and he had extracted hundred thousand dollars of equity from his more modest residence. The private lender photographed the million-dollar mansion and lobbied the US trustee's office, complaining that it was not fair that the contractor could live extravagantly while he the private lender lived in a more modest house. The US trustee's office sided with the private lender and filed a motion to convert or dismiss the chapter 7 bankruptcy.
While luxury goods may be maintained by the debtor in a bankruptcy filing, the court will examine whether the retention of luxury items works to the detriment of unsecured creditors. A luxury good maintained by the debtor for many years prior to the bankruptcy filing and which did not contribute to the events causing the bankruptcy probably can be kept or reaffirmed in the bankruptcy whether under Chapter 7 or 13. To require the debtor to surrender an item securing a debt which he had been paying faithfully in the years preceding the filing is prejudicial to the secured creditor. On the other hand, the debtors' retention of luxury items acquired in the years immediately preceding the filing are likely to result in the filing of a motion for abuse under section 707(B)of the bankruptcy code. A debtor may not prefer himself over his creditors.This blog is not intended to render legal services to the reader, including advice about bankruptcy or taxes. Consult with a lawyer concerning the specific application of the law to your unique circumstance.
This blog is not intended to render legal services to the reader, including advice about bankruptcy or taxes. Consult with a lawyer concerning the specific application of the law to your unique circumstance.
While luxury goods may be maintained by the debtor in a bankruptcy filing, the court will examine whether the retention of luxury items works to the detriment of unsecured creditors. A luxury good maintained by the debtor for many years prior to the bankruptcy filing and which did not contribute to the events causing the bankruptcy probably can be kept or reaffirmed in the bankruptcy whether under Chapter 7 or 13. To require the debtor to surrender an item securing a debt which he had been paying faithfully in the years preceding the filing is prejudicial to the secured creditor. On the other hand, the debtors' retention of luxury items acquired in the years immediately preceding the filing are likely to result in the filing of a motion for abuse under section 707(B)of the bankruptcy code. A debtor may not prefer himself over his creditors.This blog is not intended to render legal services to the reader, including advice about bankruptcy or taxes. Consult with a lawyer concerning the specific application of the law to your unique circumstance.
This blog is not intended to render legal services to the reader, including advice about bankruptcy or taxes. Consult with a lawyer concerning the specific application of the law to your unique circumstance.
Friday, October 7, 2011
TO SHORT SELL OR NOT TO SHORT SELL?
Clients frequently ask me whether they should short-sell property or not. My answer is that one should consider a short sale within the context of a bankruptcy. I DO NOT THINK ONE SHOULD SHORT SELL PROPERTY WITHOUT CONSULTING WITH COUNSEL.
Case in point, recently I met a client who short sold his residence because it was substantially underwater. He had first and second deeds of trust and had consulted with a real estate agent specializing in short sales. The client sold the property, but did not receive a release from the second deed of trust holder. When I met the client, he was being sued by the second trust lender. This has happened time and time again.
I would have advised the client differently. If he could have short sold the property with a release from the second trust lender or for a small payment to that lender, then I would have blessed the transaction. If not, then bankruptcy is a consideration among other factors.
Credit Consequences
I have continued to monitor on-line publications from Freddie Mac, Fannie Mae and FHA concerning the consequences of a short sale or bankruptcy. While a short sale may be equivalent to a material adverse credit event or a chapter 13 bankruptcy filing, it has a less dramatic impact on credit scores than judgment liens, a foreclosure or a chapter 7 filing. Using a dart board, the biggest impact on credit score would be a foreclosure, then the entry of judgment liens against the debtor, then a chapter 7 filing, then a deed in lieu of foreclosure, then a short sale and in the center of the bull's eye would be a chapter 13 filing or voluntary debt resolution (if the latter works). The center of the bull's eye represents the smallest impact on credit, around 150 points on the FICO score. Hence, the best way to preserve your credit score would be to file a chapter 13 and to short sell a property during the bankruptcy.
Bankruptcy
If the above client had qualified for bankruptcy, I would have advised the client to remain in the house and file. The client could have stated his intention on his bankruptcy filings that he wanted to retain the property and continue to pay. In such an event, he would have been relieved of his obligation to pay on the second deed of trust. After the bankruptcy, the client could have short sold the property without the threat of a lawsuit by the second trust lender. In a Chapter 7, the underwater property could have been abandoned. In addition, the administration of a chapter 7 case is relatively brief. In a chapter 13, the court may have granted permission to short sell the property. The court will not approve a short sell over the objections of a lender, but if the chapter 13 trustee will otherwise endorse the order, then the court will let the sale go through.
Tax Considerations
We expressly do not give tax advice. However, one should be aware that a short sale, foreclosure or surrender of a primary residence (upon the expiration of a patch Congress passed in 2008) or of an investment property can result in the realization of taxable income. Sometimes, a taxpayers' basis in property will be so low that even in the event of a foreclosure, the disposition of the property results in capital gains. Moreover, if the lender foregives some of the debt, the taxpayer may have phantom income known as "discharge of indebtedness income." The short sale, surrender or foreclosure of investment properties in highly inflated markets, such as Florida, Arizona or California, may result in the realization of substantial discharge of indebtedness income. According to the Internal Revenue Code, a bankruptcy filing offers an exception to the discharge of indebtedness rule.
This blog is not intended to render legal services to the reader, including advice about bankruptcy or taxes. Consult with a lawyer concerning the specific application of the law to your unique circumstance.
Case in point, recently I met a client who short sold his residence because it was substantially underwater. He had first and second deeds of trust and had consulted with a real estate agent specializing in short sales. The client sold the property, but did not receive a release from the second deed of trust holder. When I met the client, he was being sued by the second trust lender. This has happened time and time again.
I would have advised the client differently. If he could have short sold the property with a release from the second trust lender or for a small payment to that lender, then I would have blessed the transaction. If not, then bankruptcy is a consideration among other factors.
Credit Consequences
I have continued to monitor on-line publications from Freddie Mac, Fannie Mae and FHA concerning the consequences of a short sale or bankruptcy. While a short sale may be equivalent to a material adverse credit event or a chapter 13 bankruptcy filing, it has a less dramatic impact on credit scores than judgment liens, a foreclosure or a chapter 7 filing. Using a dart board, the biggest impact on credit score would be a foreclosure, then the entry of judgment liens against the debtor, then a chapter 7 filing, then a deed in lieu of foreclosure, then a short sale and in the center of the bull's eye would be a chapter 13 filing or voluntary debt resolution (if the latter works). The center of the bull's eye represents the smallest impact on credit, around 150 points on the FICO score. Hence, the best way to preserve your credit score would be to file a chapter 13 and to short sell a property during the bankruptcy.
Bankruptcy
If the above client had qualified for bankruptcy, I would have advised the client to remain in the house and file. The client could have stated his intention on his bankruptcy filings that he wanted to retain the property and continue to pay. In such an event, he would have been relieved of his obligation to pay on the second deed of trust. After the bankruptcy, the client could have short sold the property without the threat of a lawsuit by the second trust lender. In a Chapter 7, the underwater property could have been abandoned. In addition, the administration of a chapter 7 case is relatively brief. In a chapter 13, the court may have granted permission to short sell the property. The court will not approve a short sell over the objections of a lender, but if the chapter 13 trustee will otherwise endorse the order, then the court will let the sale go through.
Tax Considerations
We expressly do not give tax advice. However, one should be aware that a short sale, foreclosure or surrender of a primary residence (upon the expiration of a patch Congress passed in 2008) or of an investment property can result in the realization of taxable income. Sometimes, a taxpayers' basis in property will be so low that even in the event of a foreclosure, the disposition of the property results in capital gains. Moreover, if the lender foregives some of the debt, the taxpayer may have phantom income known as "discharge of indebtedness income." The short sale, surrender or foreclosure of investment properties in highly inflated markets, such as Florida, Arizona or California, may result in the realization of substantial discharge of indebtedness income. According to the Internal Revenue Code, a bankruptcy filing offers an exception to the discharge of indebtedness rule.
This blog is not intended to render legal services to the reader, including advice about bankruptcy or taxes. Consult with a lawyer concerning the specific application of the law to your unique circumstance.
ATTORNEY OBLIGATION TO DISCLOSE ASSETS TO COURT
An issue recently arose concerning an attorney's obligation to disclose to the bankruptcy estate that a client's parent died leaving her an inheritance within 180 days from the filing of the bankruptcy. See a prior blog article. 11 U.S.C. section 541 provides:
This blog is not intended to render legal services to the reader, including advice about bankruptcy or taxes. Consult with a lawyer concerning the specific application of the law to your unique circumstance.
Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date—
(A) by bequest, devise, or inheritance;
. . .
(C) as a beneficiary of a life insurance policy or of a death benefit plan.We concluded under the applicable Rules of Professional Conduct, Va. Sup. Ct. Rules, Pt. 6, Sec 11, Rule 1:6, that we must disclose such an event to the court because (i) our failure to do so would result in a fraud upon the court, unless we immediately withdrew from representation, and (ii) the failure to turn over assets of the bankruptcy estate would amount to bankruptcy crime.
This blog is not intended to render legal services to the reader, including advice about bankruptcy or taxes. Consult with a lawyer concerning the specific application of the law to your unique circumstance.
CREDITORS MEETINGS
A creditors' meeting provides a creditors and the bankruptcy trustee with the opportunity to examine you under oath concerning your bankruptcy petition. The proceeding is recorded by the United States Trustees office, and the statements you make are given under oath and penalty of perjury. In Richmond, the proceedings take place in the federal Counthouse for the Eastern District of Virginia. You may not bring a cell phone into the building. Also the marshall's service will not allow you to place your cell phone in a locker. DO NOT BRING A CELL PHONE to the creditors meeting in Richmond. It is very important that you give any requested documents to our office in a timely manner. The Trustee's office wants to receive documents a week before the hearing so that the trustee and the attorneys and staff at the United States Trustee's Office have a chance to review the documentation before the meeting. At the meeting you will be required to fill out an interrogatory form. Except for issues concerning your statement of intention this form is not too difficult. Clients never get the statement of intention question correct. In the bankruptcy petition, the statement of intention is an statement by you concerning how you want to handle secured debts appearing on Schedule D and any leases appearing on Schedule G. Frequently, clients affirm that automobile loans and mark retain and continue to pay for secured loans on real estate. This blog is not intended to render legal services to the reader, including advice about bankruptcy or taxes. Consult with a lawyer concerning the specific application of the law to your unique circumstance.
Wednesday, August 31, 2011
INHERITANCES IN BANKRUPTCY
As part of the intake process, I always ask clients if they have a great aunt or uncle who is going to leave them $1,000,000. Invariably the answer is no. I do this to alert clients to the fact that any inheritance given or to which the debtor becomes entitled within 180 days of filing for bankruptcy is part of the bankruptcy estate. The trustees want me to give clients this information. It is the law after all.
Last week I had a client whose mother died within the 180 day period. Obviously, this was sad for the client. I think it is even sadder that her mother's assets are now being used to pay her daugther's creditors. With proper estate planning this result could have been avoided. In fact, good estate planning is important if one has many creditors. If a client is being is being pursued by creditors or even before that point, if potential claims can be made against the debtor, then the debtor ought to alert relatives that this is a possibility. In that case, a parent, for instance, can set up a testimentary trust with "spend thift" provisions. These types of provisions allow the trustee to avoid payments to the debtor that would result in attachments by creditors. There are exemptions under state law to protect spend thift provisions in trust documents. We have an estate planning department and would be happy to assist you to protect prospective inheritances.
This blog is not intended to render legal services to the reader, including advice about bankruptcy or taxes. Consult with a lawyer concerning the specific application of the law to your unique circumstance.
Last week I had a client whose mother died within the 180 day period. Obviously, this was sad for the client. I think it is even sadder that her mother's assets are now being used to pay her daugther's creditors. With proper estate planning this result could have been avoided. In fact, good estate planning is important if one has many creditors. If a client is being is being pursued by creditors or even before that point, if potential claims can be made against the debtor, then the debtor ought to alert relatives that this is a possibility. In that case, a parent, for instance, can set up a testimentary trust with "spend thift" provisions. These types of provisions allow the trustee to avoid payments to the debtor that would result in attachments by creditors. There are exemptions under state law to protect spend thift provisions in trust documents. We have an estate planning department and would be happy to assist you to protect prospective inheritances.
This blog is not intended to render legal services to the reader, including advice about bankruptcy or taxes. Consult with a lawyer concerning the specific application of the law to your unique circumstance.
Subscribe to:
Posts (Atom)
Posts
