What you can keep after bankruptcy just increased

By doug | Published: April 9, 2013

jokerA bit of good news just came in for anyone out there considering filing a bankruptcy case:

As of April 1, 2013, the total amount of property that a debtor can “keep” after filing Chapter 7 bankruptcy increased to $12,725.00, an extra $750 over prior law.

The increase is part of an every-three years tweaking of the bankruptcy code to account for inflation.

A couple of important points about this figure: it represents the amount available under the federal “wild card” exemption, applicable to any property a debtor owns that is not covered by any other exemption. Even more good news: The federal wild card is allowed to be taken by debtors who live in either Massachusetts or New Hampshire, as well as a few other states.

The full amount may not be available, however, to debtors who have a lot of home equity built up, so it’s best to check with a bankruptcy attorney before making rash assumptions.

Like I said, the wild card can protect any type of property. In actual practice, wild card exemptions are most often applied to bank accounts and cash that otherwise would be lost upon filing. So is it possible to go bankrupt and keep over $12K in the bank? For a lot of people, you bet it is!

 

By Doug Beaton

Posted in Bankruptcy News, Exemptions | Comments closed

Dionne Warwick filing highlights effectiveness of bankruptcy against taxes

By doug | Published: March 27, 2013

warwickDionne Warwick has filed for bankruptcy. The 72 year old pop diva’s case was filed pretty far from San Jose — in the bankruptcy court in northern New Jersey.

Big numbers always make big headlines in the financial pages, and Warwick’s has a whopper — $10 million dollars due for back taxes. Of this, $7 million is owed to a single creditor — the Internal Revenue Service, for the 1991-1999 tax years.

Although the numbers might be a lot higher, Warwick’s case has a lot in common with middle income folks who file for bankruptcy in Massachusetts and New Hampshire.

First, back taxes is a common, and a proper reason to file a bankruptcy case. When the taxes are old, as they are here, they will usually be discharged without a fuss in bankruptcy court.

Second, the case highlights the aggressive tactics used by the IRS to squeeze taxpayers. As described by Dionne Warwick’s publicist:

‘‘In light of the magnitude of her tax liabilities, (Dionne) Warwick has repeatedly attempted to offer re-payment plans and proposals to the IRS and the California Franchise Tax Board for taxes owed,’’ Kevin Sasaki said in an email Tuesday. ‘‘These plans were not accepted, resulting in escalating interest and penalties. Although the actual amount of back taxes owed has been paid, the resulting penalties and interest has continually accrued.’’

As far as differences go, Warwick’s income is far greater than the average bankruptcy file — an estimated $20,950 per month, mostly from song royalties. At that level, expect her to end up in a Chapter 13 case, where she will have to partially repay creditors with monthly payments to her bankruptcy trustee.

 

By Doug Beaton

Posted in Bankruptcy News, Taxes | Comments closed

rules on sucessive bankruptcy discharges clarified

By doug | Published: March 21, 2013

timeMassachusetts bankruptcy attorneys got an important clarification recently from U.S. Bankruptcy Court judge Melvin Hoffman on how much spacing there must be between bankruptcy cases for a debtor who wants a Chapter 13 discharge, but who has previously received a Chapter 7 discharge.

This situation involves section 1328 (f) of the bankruptcy code, which bars a second Chapter 13 discharge if a debtor has filed a previous case under Chapter 13 within four years, or a previous case under Chapter 7 within two years.

In the Johnson case, decided on March 11, 2013, the debtors had filed a Chapter 13 case in 2008, converted in to Chapter 7 in 2009, and got their Chapter 7 discharge in April, 2010. Then they filed a follow-up Chapter 13 case in August of 2012, and petitioned the court for another discharge.

Judge Hoffman made two important rulings in this case. First, he determined that the time periods involved should be calculated by measuring from the filing date of the first case to the filing date of the second, ignoring both the dates of conversion and the date the first discharge was issued.

Second, he ruled that the original Chapter of the filing, not the chapter of conversion controlled which time period to apply.

In this situation, that was bad news for the debtors, who had filed their second case just a few days short of four years from the first one. Because the first case was filed under Chapter 13, the judge applied the four year rule, and denied any discharge in the second case.

 

By Doug Beaton

Posted in Bankruptcy News, Chapter 13, Chapter 7 | Comments closed

Aggressive moves by Mass. DOR shot down in bankruptcy court

By doug | Published: March 20, 2013

taxesPeople behind on their Massachusetts state income taxes have an aggressive foe out there — the Massachusetts Department of Revenue.

Mass. DOR has been taking some pretty far-out positions in court on bankruptcy cases filed by Massachusetts residents looking to discharge back taxes. Just recently, they argued in Judge Hoffman’s courtroom that all tax returns that were filed late could never be discharged in bankruptcy.

Thankfully for debtors state-wide, the judge didn’t agree, and it is still possible for late returns to sometimes result in a discharge.

The dispute, decided in the twin cases of Brown and Gonzalez, on March 11, 2013, both involved unrelated debtors who both filed bunches of Mass. returns late, and then more than three years later each filed for bankruptcy.

This situation is governed by section 523 of the bankruptcy code, which has a “two year rule,” allowing for a discharge of the tax only if the late tax returns were filed more than two years before the bankruptcy.

Mass. DOR, on the other hand, wanted their own rule enforced — saying virtually any tax debt for a late return couldn’t be discharged in bankruptcy.

Judge Hoffman ruled that such an extreme approach could not have been what the drafters of section 523 had in mind when the section was amended back in 2005, and granted the debtors their discharges.

There are three important takeaway points in these cases:

First, the two year rule survives, at least where the late tax return is filed before the tax authority (IRS or DOR) gets around to formally assessing the tax on their own.

Second, bankruptcy practitioners need to be aware that Mass DOR will sometimes pursue unreasonable long-shot positions that require additional litigation in bankruptcy court.

And third, bankruptcy lawyers should not be reluctant to take them on. Just because a bureaucrat takes a legal position doesn’t mean it is correct. This is especially true in the often upside-down world of bankruptcy court.

 

By Doug Beaton

Posted in Taxes | Comments closed

Do you have to pay a Chapter 13 trustee ten percent?

By doug | Published: March 4, 2013

percentWhen bankruptcy debtors file Chapter 13 cases, they have to pay a fee, or commission to the Chapter 13 trustee that administers their case. This is how the trustee gets paid. The commission is typically ten percent of the payments made through the plan. So if a debtor’s plan calls for a monthly payment of $500, the plan usually will give the trustee $50 of that, and so on?

But is it possible to propose a lower payment?

A married couple in Massachusetts tried it recently — and lost. They proposed to pay the trustee 9% instead. The difference in payments was a whopping $10 per month. Over the five years of the plan, it came to $600 total. For that amount, the case went to court when the trustee protested.

The debtor’s argument was that trustees don’t actually get paid 10%. Instead, they are allowed a fee that changes from year to year, and is set by the federal government based on financial conditions. The maximum fee they can get is 10%, so that is what goes on the pre-printed forms that attorneys use. Recently, the actual fee trustees are allowed has been 8.75%. Any difference is used to pay a little more out to the creditors.

But in the Tagliavia case, bankruptcy court judge Melvin Hoffman decided that debtors in his court need to use the forms as they are and propose a trustee fee of ten percent. He said that the system would be unworkable otherwise, because plans would have to be constantly amended and the rate floats up and down.

The judge thought that would make a mockery out of the budgets that Chapter 13 debtors file with the courts: if they could be constantly manipulated to fit the trustee’s fee, it would give the impression that debtors weren’t being honest about their expenses in the first place.

So, at least in Judge Hoffman’s court, Massachusetts bankruptcy debtors need to plan on paying a ten percent fee to the trustee if they file a case under Chapter 13.

 

By Doug Beaton

Posted in Bankruptcy News, Chapter 13 | Comments closed

Film gives debtors a taste of what a bankruptcy hearing is like

By doug | Published: February 27, 2013

oscarsThe Oscars were given out in Hollywood recently (left), and that always get us thinking of what’s up at the movies.

As far as bankruptcy law goes, the US government has recently produced a few short videos about how the process works.

Government films are famous for either being snore-fests or propaganda, and these are essentially the same folks who made all those old Army training films about avoiding social diseases. Nevertheless, nothing scares many debtors more than the “meeting of creditors” they are required to attend when they file a bankruptcy case.

These hearings are not really that intimidating, but in the interest of calming yourself down, it might help to watch this short government film of one:

Film of a bankruptcy hearing (1:39)

For debtors in Massachusetts or New Hampshire, it’s worth noting that trustees here rarely ask about your credit counseling certificate (it’s delegated to the court clerk to worry about that), and your attorney will have already sent your taxes to the trustee before the hearing. It is, however, very important to bring your identification and social security card to the meeting.

 

By Doug Beaton

Posted in Practical tips | Comments closed

Bizzare new question may face Massachusetts bankruptcy debtors

By doug | Published: February 22, 2013

questionI watched about an hour’s worth of “section 341” meetings recently, and was surprised to hear the trustee asking a question I don’t think I’ve heard before.

The trustee showed the debtors their Schedule C, and then asked:

“Have you purchased any of these assets within one year of filing the bankruptcy case?

That’s a little weird, because its not against the bankruptcy code — or any other law I know of — to buy ordinary things before filing a case. Luxury goods, yes, there is a ban on stocking up on those, but it would be tough to imagine someone not buying any thing at all for a year (even though everyone I heard get asked this answered “no”).

My best guess is that this particular trustee might be trying to flush out if debtors are engaging in bankruptcy planning — a practice that itself is not exactly illegal, although it is not beyond being questioned in the courts.

A typical example of bankruptcy planning: a 40 year old single debtor (call him Doug) has $8,000 in a bank account bit no car to get to work. The Massachusetts bankruptcy exemptions for a bank account are $2,500 and for a car are $7,500. So he takes $6,000 to buy a used car, and now falls within the limits for both categories.

I don’t know if this annoying new question is something that is going to spread statewide, or is just confined for now to a particular trustee in Worcester. But if I hear it from anyone else, I’ll post it here.

 

By Doug Beaton

Posted in Chapter 7, Practical tips | Comments closed

Bankruptcy rule changes in New Hampshire take effect February 1st

By doug | Published: February 1, 2013

old manHeads up for attorneys with a New Hampshire bankruptcy case to prepare: there has been a lot of tinkering with the local bankruptcy rules in NH, and the changes took effect on February 1, 2013.

One of the rules with a lot of edits is local rule 1009-1 concerning making amendments to schedules that have already been filed. For example, from now on, anyone making changes to schedules I and J will need to include “a complete copy of the schedule, as amended, both pages of amended Official Form 6,
“Summary of Schedules/Statistical Summary of Certain Liabilities and Related Data (28 U.S.C. § 159).”

Schedules I and J are among the most frequently amended in consumer bankruptcy cases. Schedule I list the debtor’s income, and schedule J lists household expenses, and business expenses, if any.

if you are looking for the nitty-gritty on all of the changes, you can get a summary by clicking here.

 

By Doug Beaton

Posted in Practical tips | Comments closed

Hardship discharges are available in Chapter 13

By doug | Published: January 31, 2013

depression

What happens to bankruptcy debtors who are in a Chapter 13 case, but hit a bump along the road and find that they are no longer able to make their monthly payments to the trustee? In cases like this, a hardship discharge may be available.

There are three essential requirements, all found in bankruptcy code
section 1328 (b). First, the debtor’s failure to complete their plan must be “due to circumstances for which the debtor should not justly be held accountable.” Either debtor or spouse getting laid off from a job would be the classic example. Quitting or getting fired for cause, not so much. Judges have great latitude deciding exactly what constitutes unusual circumstances.

Second, creditors must have already received more through plan payments than they would have gotten in a hypothetical Chapter 7 filing. For most debtors this will not be an obstacle, but if the case was filed in Chapter 13 because there were substantial non-exempt assets, it could preclude the hardship route.

Third, the “bump in the road” needs to be substantial enough that it can’t be fixed by submitting a modified plan. If extending the term of the plan (to a maximum of 60 months) would lower payments, the court might insist you take that route instead.

Debtors and bankruptcy lawyers also need to be aware of the limitations of the hardship discharge. By law it does not cover secured or priority debts, so that debtors with mortgage or tax problems need to carefully consider whether the benefit of the discharge is worth the effort of applying to the court for one.

 

By Doug Beaton

Posted in Chapter 13 | Comments closed

Massachusetts debtor nearly loses house in “simple” bankruptcy

By doug | Published: January 29, 2013

andover houseAn Andover woman nearly lost her $600,000 home when she filed a routine consumer bankruptcy case recently — and her hair-raising adventure highlights one of the biggest traps out there for Massachusetts bankruptcy attorneys.

The debtor in the Welch case owned a house worth $608K with a mortgage of $314K on it. She had filed a homestead exemption on it, which under normal circumstances would protect up to $500K of home equity.

However, prior to the bankruptcy the debtor had put the house in a trust where she was the beneficiary of 99% and her son was the beneficiary of 1%. Later, this was switched so that the debtor was the beneficiary of 100% of the trust.

It was this latter move that caused the problems. Chapter 13 trustee Denise Pappalardo argued that this transfer triggered the provisions of section 522 (p) of the bankruptcy code.

The section in question puts an absolute cap (presently $146K) on the homestead exemption, regardless of what state law allows, if a property has been transferred within 1215 days prior to the date the bankruptcy case was filed.

Limiting the debtor’s homestead exemption to $146K would have meant there was about $148K in unprotected equity available for creditors — and probably forced the sale of the house. However bankruptcy judge Melvin Hoffman ruled — narrowly — that the late switch in trust ownership was not the kind of “transfer” covered by 522 (p).

The judge also pointed out the inherent problems with this part of the bankruptcy code: “The legislative history of § 522(p) makes clear that it was intended to plug the ‘mansion loophole’ whereby an individual owning a high-priced residence in a lowdollar homestead state could sell that home and reinvest the proceeds in a high-priced residence in a state with unlimited homestead protection like Florida or Texas, then file bankruptcy and exempt from creditors the entire homestead.” In re Gentile, 483 B.R. 50, 53 (Bankr. D. Mass. 2012) (internal citations omitted). Regrettably, the statute which ultimately emerged from the legislative sausage-making process covers a far wider spectrum of transactions than the one Congress set its sights on. This has resulted in a brisk business for the bankruptcy court as trustees and creditors seek to capture within the boundaries of the statute an ever-expanding array of real estate related transfers.”

Massachusetts has never had a reputation as a low-dollar homestead state (if anything, it’s the opposite), and this debtor obviously didn’t even move anywhere. Nevertheless, she came close to being snared by section 522 (p) anyway. The case is a good warning to lawyers in Massachusetts to take a careful look at any real estate title issues before filing cases claiming the Massachusetts homestead exemption.

 

By Doug Beaton

Posted in Real estate | Comments closed
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