Prior to January of 2021, the homestead exemptions in California were $75,000 for single persons, $100,000 for a “family unit” (married and/or with dependents), and $175,000 for the elderly and disabled. The new homestead exemptions are now significantly increased and vary depending on which county you reside in. The minimum homestead exemption is $300,000, and the maximum homestead exemption is $600,000. The homestead exemption amount in any particular county is based on “the countywide median sale price for a single-family home” in the prior year.

For counties like Orange and Los Angeles, where it is undisputed that the countywide median sales price is well over $600,000, this is fairly easy to calculate since the exemption is capped at $600,000. Therefore the homestead exemption in these counties is $600,000. Things get a little tricky when looking at counties with a median sales price below $600,000, such as Riverside and San Bernardino. Unfortunately, the legislature did not specify what source determines these figures. Zillow is not a credible source, the census is only done every 10 years… so what is controlling?

Somehow, this question remains unanswered. Many of us in the legal community have cited the California Association of Realtors’ published housing and sales data since they are a reasonably credible source. As of the date of this article, this information has not yet been published. However, going by estimates from other sources online, it appears that the homestead exemption in Riverside is now somewhere between $525,000 and $588,000 and the homestead exemption in San Bernardino is somewhere between $430,000 and $470,000. Both of these figures are up by about $100,000 from last year, which seems to accurately coincide with how much home values have sky-rocketed in the past two years.

It is still undisputed that the homestead exemptions in Orange, Los Angeles, and San Diego Counties remain at the $600,000 cap.

For more information about the new homestead exemptions, as well as other major factors that can be relevant when it comes to protecting your home in bankruptcy, please read my earlier post from when the laws went into effect.

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The Community Discharge

As the Byzantine provisions of the Bankruptcy Code often border on incomprehensible, even to those who drafted them, a simple reading of §524(a)(3) casts little light on the operation of that section in terms of its day-to-day application. Thus, to better understand how the community discharge works, it should first be understood that a bankruptcy discharge does not extinguish a debt, but rather enjoins the collection of the debt and voids any judgment determining the liability of the debt debtor. 11 U.S.C. §524(a)(1)-(2).

Thus, where there exists a co-debtor, such as a spouse, the debt remains enforceable as against that co-debtor. However, an exception exists under Chapter 13, where §1301 operates as a stay protecting an individual co-debtor from proceedings to collect a consumer debt. In those states that have adopted the community property system of marital property law, the Bankruptcy Code extends the discharge injunction to protect the community estate in order to preserve the debtor the full benefit of the discharge and unsure a “fresh start.”

Conceptually, the discharge under §524 wipes out the debtor’s personal liability, and all proceedings to enforce claims which existed as of the date of the bankruptcy filing are permanently enjoined. In addition, upon the closing of the bankruptcy case, all property of the estate that was claimed and allowed as exempt or abandoned by the trustee in the case revests in the debtor – free of any further claims with respect to the discharged claims. This encompasses all of the debtor’s interest in the community as of the date of the order for relief – usually the date the petition was filed except in involuntary cases. 11 U.S.C. §541(a)(2).

However, because of the interplay between the Bankruptcy Code and the California Family Code, certain claims against the debtor’s non-filing spouse that remain enforceable against the non-filer, but for the operation of §524(a)(3), would be enforceable against the community property acquired after the bankruptcy discharge. As the goal of granting the debtor’s “fresh start” would be abrogated if the claim bidders discharged in the bankruptcy could come in the “back door” by enforcing their claims against the non-filing spouse and the community estate, including the debtor’s interest in the estate, the drafters of the Bankruptcy Code added subsection §524(a)(3) to avoid such a result.

The Requirements of a Joint Filing

Typically, where a married couple is jointly liable for the majority of their debts, both will join in the bankruptcy petition. However, in order to do so, both must be eligible for the relief sought. Not all persons are eligible for Chapter 7 relief. For example, a person who has obtained a discharge in a Chapter 7 case within the last eight years or a discharge in a Chapter 13 case paying less than 70% of the allowed unsecured claims within the prior six years is ineligible. Also, even if eligible, a debtor may be unable to discharge certain debts, such as claims based on fraud, willful and malicious injuries, embezzlement, and the like. Where such a situation exists, the ineligible spouse or the spouse unable to benefit from the discharge will not join in the bankruptcy petition. Nevertheless, the filing spouse will still obtain a discharge of their personal liability, thus barring enforcement of the discharged claims against all property of the estate not administered by the trustee.

The Dilemma

The dilemma existed where the creditors, whose claims against the non-filing spouse remained, sought to enforce their claims against community assets acquired subsequent to the bankruptcy petition. California community property law makes the community estate liable for all debts incurred by either spouse before or during the marriage. See California Family Code §910. In addition, except with regard to pre-marital debts, since post-marital debts earnings are community property, the creditors of either spouse can reach post-bankruptcy the earnings of either spouse. See California Family Code §§760 and 911(a). As a result, the newly discharged spouse, promised a “fresh start” in furtherance of the purposes of the Bankruptcy Code, could find their property and earnings subject to execution or garnishment in order to satisfy the debts of the non-filing spouse. How does §524(a)(3) resolve this dilemma?

First, it needs to be understood that the so-called “community discharge” is not an actual discharge – it is actually only an injunction against the enforcement of debts. Section 524(a)(3) does not grant the “community” a discharge (In re Costanza, 151 B.R. 588 (Bankr. D.N.M. 1993)), nor does it prevent a creditor of the estate from seeking to enforce its claim as a personal liability of the non-filing spouse or from executing upon the non-filing spouse’s separate property. Matter of Kastner, 197 B.R. 620 (Bankr. E.D. La. 1996). Instead, its injunctive protection extends solely to the community assets acquired following the filing of the bankruptcy. To do this, §524(a)(3) enjoins the enforcement of a “community claim” against community property which is acquired post-bankruptcy. In re Karber, 25 B.R. 9 (Bankr. N.D. Tex. 1982); In re Smith, 140 B.R. 904 (Bankr. D.N.M. 1992); In re Strickland, 153 B.R. 909 (Bankr. D.N.M. 1993).

The Community Claim

What is a “community claim”? Bankruptcy Code §101(7) defines a community claim as a “claim that arose before the commencement of the case… for which [community] property is liable, whether or not… such property [exists] at the time of the commencement of the case.” What constitutes community property is to be determined in accordance with state law. Matter of Grimm, 82 B.R. 989 (Bankr. W.D. Wis. 1988). In other words, if a claim existed at the time the bankruptcy was commenced, and that claim is one which reached the community estate, it cannot reach community property interests after the bankruptcy, even where it is a claim solely against the spouse who did not seek or obtain a discharge and even where the community asset protected was not yet property of the community estate!

Limitations to the Non-Filing Spouse

Of course, there are limits to how effectively a non-filing spouse can shield themself and their interests in community property from creditors. As noted above, the injunction of §524(a)(3) only extends to community property. The non-filing spouse’s separate property enjoys no protection. In addition, the injunction survives only as long as the community. Upon termination of the marriage by annulment, dissolution, or death, the community estate ceases and with it the injunction of §524(a)(3). In re Costanza at 589.

Also, the “community discharge” will not apply where the non-filing spouse attempted to obtain a discharge within a discharge within six years before the filing spouse’s bankruptcy and was denied a discharge, or where the bankruptcy court would not grant the non-filing souse a discharge if the non-filing spouse filed a case on the date that their spouse filed a case and such a determination is sought within the time permitted. 11 U.S.C. §524(b). This is also true where the community claim has been determined to be non-dischargeable in the filing spouse’s case, or which would be found to be non-dischargeable by the non-filing spouse in a hypothetical case filed on the same date and such a determination is sought within the time permitted. In re Braziel, 127 B.R. 156 (Bankr. W.D. Tex. 1991); see also 11 U.S.C. §524(a)(3).

The Trap

Does §524(a)(3)-(b) create a trap for the unwary? Absolutely. If not vigilant, a person who has not even filed a bankruptcy case may obtain essentially all of the benefits of a discharge simply because their spouse filed for bankruptcy, even if the non-filer could not have obtained a discharge or discharged a particular debt. Furthermore, this may occur even where the affected creditor had no claim against the spouse who filed bankruptcy. This is because there is a relatively brief period during which the creditor may challenge the right of the non-filing spouse to obtain the benefits of a community discharge, and it must be raised in the non-filing spouse’s bankruptcy case. Federal Rules of Bankruptcy Procedure 4004 requires that such determinations be sought by filing a complaint within 60 days following the date set for the first §341(a) Meeting of Creditors, which typically occurs 30 to 45 days after the filing of the petition.

While discharge requires that the creditor be given notice, that notice will only reflect the filing spouse’s name and Social Security number. Thus, the creditor is faced with a dilemma; it has received a bankruptcy notification, but the person filing this bankruptcy may be completely unknown to the creditor who only knows of the non-filing spouse. Yet, if that creditor fails to timely raise the issue of dischargeability and the community discharge prior to the expiration of the 60-day deadline, they will forever lose their right to do so.

Preventative Measures

What can be done to protect your interests? If someone wants to maintain the benefit of the community discharge to block collection efforts, it is essential that, in addition to avoiding the termination of the community, the community property nature of assets acquired following a spouse’s bankruptcy be preserved. Post-marital agreements that have the effect of characterizing earnings of separate property should be carefully avoided, as should transmutation agreements that convert community property assets to the separate property of the non-filing spouse.

Conclusion

There is no doubt that the concept of the “community discharge” is troubling as it can be used to protect an undeserving spouse. As one widely cited commentator has suggested, “the Devil himself could effectively receive a discharge in bankruptcy if he were married to Snow White.” See Alan Pedlar, Community Property and the Bankruptcy Act of 1978, 11 St. Mary’s L.J. 349, 382 (1979). Nevertheless, that protection, deserved or not, does not come without a price. As the Court in Costanza further noted, “if the Devil does not treat Snow White better than his creditors, she will, by divorcing him, deny his discharge.”

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I.
CHANGES IN THE DEFINITION AND TREATMENT OF SPOUSAL SUPPORT AND CHILD SUPPORT CLAIMS

A. Prior law: Under the prior Bankruptcy Code (“the Code”), the definition of claims for spousal support and child support was primarily left to state law, although Section 101(12A) of the Code defines “debt for child support” as a debt of a kind specified in Section 523(a)(5) of the Code for the maintenance or support of a child of the debtor. In other words, other than to look to state law, the prior Code defined child support in terms of its non-dischargeability.

B. New support definition: Under BAPCPA, a new definition was added for a “domestic support obligation” (hereinafter “DSO”) at Section 101(14A). The new section states:

“The term “domestic support obligation” means a debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable non-bankruptcy law notwithstanding any other provision of this title, that is — (A) owed to or recoverable by — (I) a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative; or (ii) a governmental unit; (B) in the nature of alimony, maintenance or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child’s parent, without regard to whether such debt is expressly so designated; (C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of application of – (I) a separation agreement, divorce decree, or property settlement agreement; (ii) an order of a court of record; or (iii) a determination made in accordance with applicable non-bankruptcy law by a governmental unit; and (D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative for the purpose of collecting the debt.” (emphasis added)

This definition of DSOs largely comports with the already existing definition of debts that are not dischargeable as a result of Section 523(a)(5) of the Code. Accordingly, existing appellate decisions construing the terms “alimony,” “maintenance,” and “support” under the prior Code will still provide guiding precedent under BAPCPA.

C. RDPs Excluded: Although the term “domestic support obligation” has a certain ring suggesting otherwise, arguably excluded from the new definition are obligations for support that may be owing to Registered Domestic Partners (RDPs), even though such awards may now be ordered in actions brought under the California Family Code after January 1, 2005 pursuant to the provisions of Family Code § 297.5. Such new definition accords with the federal “Defense of Marriage Act” (DOMA), which excludes from recognition under federal law same sex marriages or support obligations arising from such relationships. This may raise serious concerns for California family law practitioners, whose practices may be expanding to address the needs of RDPs, who can either be members of the gay and lesbian community or seniors who elect to become RDPs to avoid the loss of Social Security and other benefits. While traditionally, the prior Code allowed state law to govern the determination of just what constitutes an order for alimony, maintenance or support, BAPCPA incorporates a definition that excludes all but support owing to a spouse, former spouse or child, leaving obligations of support to RDPs outside the protections. Even opposite-sex seniors who have chosen to become RDPs are excluded. But see discussion of In re Cusimano, 8:10-bk-23646-ES (Bkrtcy.C.D.Cal. November 12, 2013) in Recent Developments.

III.
INCREASED PRIORITY OF DOMESTIC SUPPORT OBLIGATIONS

A. Prior treatment of support claims: In bankruptcy parlance, the term “priority” refers to the classification and order of payment of certain unsecured claims in the distribution of dividends paid from the bankruptcy estate. As priority claims are paid ahead of general unsecured, non-priority claims, such treatment is highly favorable to the priority claim holder, especially where there are insufficient estate assets to pay all claims in full, as is typically the case. Under the prior Code, obligations for spousal support and child support were deemed priority claims under Section 507, and were assigned a seventh priority, just ahead of tax claims owing to the Internal Revenue Service and other state taxing authorities, and behind administrative claims and other claims rarely arising in a consumer case, e.g., employee wage and benefit claims, debts owing to grain storage facility operators and fishermen, etc. 

B. Enhanced Priority Classification and its Effect: BAPCPA elevates DSOs to a first priority claim. However, it does not stop there, as the first priority class has been subdivided into three subclasses. Subclass (A) is assigned the highest priority and includes all DSOs owing to a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative.

However, if the domestic support claim is assigned by operation of law to a governmental unit, it is relegated to a Subclass (B) status behind nonassigned claims. If the assignment is voluntarily for collection, the claim retains its Subclass (A) status. While this would appear to leave Subclasses (A) and (B) as the highest priority, in fact new class (C) trumps both, as it is reserved for claims of administrative expenses of trustees appointed in Chapters 7, 11, 12 and 13 to the extent such expenses are to be paid in cases where assets are available to pay domestic support claims.

The elevation of the domestic support claims to first priority status, while touted as a “pro family” measure, is largely symbolic, given that few claims of higher priority exist in consumer cases under existing law (see above), the vast majority of consumer Chapter 7 cases are “no asset” cases, i.e., all assets are claimed as exempt and/or are of nominal value to the estate and insufficient to warrant liquidation – thus “no assets”, or in cases filed under Chapter 13, where confirmation of the plan requires that it provide for payment in full of all priority claims, including child and spousal support.

IV.
ALLOWANCE OF POST-PETITION INTEREST ON DOMESTIC SUPPORT OBLIGATIONS PAID THROUGH CHAPTER 13 CASES

A. Interest on support claims: Under prior law, while child and spousal support obligations were classified as priority claims and pursuant to Section 1322(a)(2) required to be paid in full as a condition of confirmation of a Chapter 13 plan (see below), payment of interest through the plan was not allowed on such claims. Section 502(b)(2) of the Code provided that post-petition interest accruing on a priority claim is generally not considered to be part of the claim and therefore was not allowable as a claim against the bankruptcy estate. As a result, debtors emerged from successful completion of Chapter 13 plans, only to confront substantial nondischarged claims for unpaid interest accruing on the support claims during the plan tenure. With plans of up to 60 months duration, at the lawful rate of 10% APR, such interest claims could be substantial and impair the debtors’ fresh start.

B. Interest allowed in 100% plans: As a result of changes in BAPCPA, debtors in Chapter 13 may now provide that, in addition to the payment of the priority support claim in full, already a requirement for confirmation of Chapter 13 plans, they may propose to pay accruing post-petition interest on the claim, thereby insuring that debtors emerge free of unpaid support claims. The payment of such interest is a permissive provision, not mandatory, and is permitted only in cases where the plan otherwise provides for all allowed claims. In other words, in cases where the debtor proposes less than 100% payment of allowed unsecured claims, payment of interest on nondischargeable claims is not permitted.

C. Certification of payment of post-petition support: In addition, BAPCPA requires that prior to granting a debtor a discharge upon completion of a Chapter 13 plan, the debtor must certify that all post-petition support, as well as pre-petition support obligations provided by the plan, have been paid as a condition to discharge.

V.
PAYMENT IN FULL OF PRIORITY DOMESTIC SUPPORT CLAIMS AS CONDITION OF CONFIRMATION OF CHAPTER 13 PLANS.

A. Payment of support arrears claims as condition to confirmation: A Chapter 13 plan that does not pay all DSOs in full cannot be confirmed over objection by the domestic support unless the debtor proposes to commit all disposable income into the plan. Thus, the domestic support creditor holds a powerful hand in situations where the debtor lacks income sufficient to pay such claims in full, whether in a 60-month or shorter term plan. Debtors in such cases must negotiate terms acceptable to the domestic support creditor or pledge all disposable income to the plan for the full 60-month term.

B. Payment of current support as condition to confirmation: As a condition to confirmation of Chapter 13 plan, BAPCPA requires the debtor to demonstrate that he or she is current with payment of all post-petition DSOs. The burden is not upon the domestic support creditor to object where post-petition support defaults exist. Instead, BAPCPA requires that the debtor affirmatively establish that such condition be met. Furthermore, the debtor’s failure to remain current in the payment of post-petition will be grounds for dismissal.

VI.
THE ELIMINATION OF AFFIRMATIVE DEFENSES TO NONDISCHARGEABILITY OF NON-SUPPORT MARITAL DEBTS IN CHAPTERS 7 AND 11

A. “Marital debt” exception to discharge under prior law: The addition of Section 523(a)(15), the “marital debts” exception to discharge, in 1994 was a substantial change in existing law, as for the first time all non-support debts owing to a spouse or former spouse arising under a marital settlement agreement or a judgment of dissolution of marriage or legal separation were made presumptively non-dischargeable, shifting to the debtor the burden of proving the existence of one of two available defenses. Once the non-debtor spouse or former spouse established that the claim arose under the terms of a marital settlement agreement or judgment of dissolution or legal separation and not for or in the nature of support (if for, or in the nature of support, such claims was conclusively nondischargeable and the inquiry ended there), then the debtor was given the opportunity to demonstrate that either the debtor was unable to pay the claim from income otherwise needed to maintain and support the debtor and the debtor’s dependents, and to operate the debtor’s business where engaged in business, or alternatively that the benefit of the discharge to the debtor outweighed the detriment to the spouse or former spouse.

B. BAPCPA’s elimination of the “affirmative defenses”:  BAPCPA entirely eliminated the affirmative defenses to nondischargeability claims made under Section 523(a)(15), no doubt much to the relief of the bankruptcy judges charged with hearing what many considered tawdry tales of misfortune. While non-debtor spouses no doubt applaud the elimination of the affirmative defenses that bred much litigation in the bankruptcy courts over the past 11 years, the ability to discharge such non-support claims in Chapter 13 has been preserved. Continuing prior law, while nondischargeable in Chapters 7 and 11, non-support claims owing to spouses or former spouses that arise under the terms of marital settlement agreements or judgments for dissolution or legal separation remain dischargeable as general unsecured claims in Chapter 13. However, as discussed elsewhere, with BAPCPA’s tightening of the definition of “disposable income” in Chapter 13, the prospects of a meaningful repayment of general unsecured claims in such cases appears to be enhanced.

C. No marital debt exception for claims owing to non-spouse third parties: It should be noted that in order for such non-support claims to be excepted from discharge in Chapters 7 and 11, the debt must be owing to the spouse or former spouse. Cases construing Section 523(a)(15) under the Code have long held that the assignment of such claims is fatal, and there exists no implied exception for claims owing to third parties that are in the nature of non-support claims. Thus claims owing to the non-debtor spouse’s attorney, to court appointed minors’ counsel, child custody evaluators and other third parties cannot be saved from discharge under Section 523(a)(15). However, as noted above, such claims may continue to be excepted from discharge under the provisions of Section 523(a)(5) as being for, or in the nature of support, as this section and the long chain of cases construing it remains largely unchanged by BAPCPA.

VII.
CHANGES IN THE SCOPE OF THE AUTOMATIC STAY AFFECTING FAMILY LAW CLAIMANTS

A. Prior law: Upon the entry of an order of relief in a bankruptcy case, the filing of the petition in a voluntary case, a stay comes into existence automatically. No further steps were required and no judicial action needed be taken by the court. The automatic stay served to stay all proceedings against the debtor or against property of the estate, expect with regard to those exceptions to the stay as provided by the Code. Unless the stay was lifted or modified by court order, it remained in effect until a discharge was granted (or denied) or the case was dismissed. The prior Code was amended in 1994 to broaden the exception to the scope of the automatic stay to allow not only the enforcement of child and spousal support obligations against the debtor and the debtor’s property which is not property of the estate, e.g., post-petition income, but to permit establishing and modify support obligations and establishing paternity as an incidental proceeding to obtain support.

B. Expansion of exceptions to automatic stay: BAPCPA further modified the automatic stay by expanding the exceptions to the stay to include the commencement or continuation of proceedings (1) to determine custody and visitation, (2) dissolution of marriage except to the extent of property that is not property of the estate, such as ERISA qualified pensions; (3) domestic violence proceedings; (4) collection of domestic support claims from property of the debtor that is not property of the estate; (5) collection of domestic support claims from income that is property of the debtor or the estate; (6) license suspension proceedings; (7) credit reporting; (8) tax refund intercepts; and (9) enforcement of medical obligations.

These were not insignificant changes, as the courts have generally held that exceptions to the automatic stay are to be strictly and narrowly construed to the limited exceptions enumerated. As a result, non-debtor spouses had previously been forced to seek orders from the bankruptcy court lifting or modifying the stay, an often burdensome and time-consuming step that many family law litigants can ill afford. With the expanded exceptions to the stay, virtually all phases of a typical dissolution proceeding, other than the division of the community estate, can now proceed notwithstanding one of the spouses filing bankruptcy. Thus, bifurcations as to status can proceed, custody determinations made, even “kick-out” and other personal restraint orders issued, even though the cost of pursuing or defending such proceedings, or the impact of such orders may significant effect the debtor spouse financially. Gone are the days when the burden of proceeding is shifted to the nondebtor spouse faced with a bankruptcy proceeding.

C. Query: With the expansion of the exception to the automatic stay now encompassing “the commencement or continuation of . . . a proceeding . . . for the dissolution of a marriage”, can a nondebtor spouse also seek an award of pendente lite attorney’s fees and costs in the face of bankruptcy arguably filed by the other spouse in an effort to thwart the nondebtor spouse’s attempts to obtain pendente lite relief? The inclusion of the limiting language to the new exception of “except to the extent that such proceeding seeks to determine the division of property that is property of the estate” would seem to suggest that such an award would be permissible as long as not ordered paid from property of the estate.

D. Caveat: As the expanded exception speaks to the enforcement of the newly redefined “domestic support obligations” and to “proceedings for the dissolution of marriage”, actions involving RDPs are excluded from the exception, so too possibly are proceedings for legal separation and annulment inadvertently omitted. But see discussion of In re Cusimano, 8:10-bk-23646-ES (Bkrtcy.C.D.Cal. November 12, 2013) in Recent Developments.

VIII.
LIMITATIONS ON EXEMPT PROPERTY

A. What State Exemption Laws Apply? Although there exists a federal exemption scheme, it has a state-by-state “opt out” election and California long ago opted out. This remains true under the new Act, but the right to elect California’s exemptions, which tend to be more generous, is now limited. Debtors must now use the exemption laws available in the state where the debtor has been domiciled for the past 730 days (2 years). However, in cases where the debtor has not resided in California for the 730 days prior to the bankruptcy filing, he or she must count back 730 days, then use the exemptions allowed by the state in which he or she resided for the greatest portion of the 180 days prior thereto.

In other words, a debtor who moved to California from Ohio 690 days prior to the filing, and thus fails to meet the 730 day rule to claim a California homestead of $75,000 to $175,000 (see below), must look to the 180 days before that date. If that debtor had previously been living in California, took a job in Cleveland and was laid off after five months (150 days) and returned to California, he would not have met the 730 day domiciliary requirement and yet for the majority of the 180 day period prior to the 730 day period would have been domiciled in Ohio. His reward? A paltry $5,000 Ohio homestead exemption, rather than a California homestead exemption of up to $175,000.

B. Limitations on Homestead – BAPCPA: To combat the problem of debtors relocation to states with unlimited homesteads, e.g., Iowa, Texas and Florida, under BAPCPA, if the debtor acquired the homestead within 1,215 days (3 years, 120 days) prior to filing the bankruptcy, then the homestead cannot exceed $125,000. However, to the extent that a debtor “rolled over” a homestead from another state within the 1,215 days, the amount of the homestead allowed in the other state will not be counted against the “cap”. In effect, in California where maximum homestead is $175,000, this would allow seniors, the disabled and the class of working poor aged 55 or older to rollover up to $50,000 from a homestead in another state that allowed a homestead exceeding $125,000.

C. Homestead “Surcharged” by Fraudulent Transfers Made within 10 Years: If, within 10 years prior to the filing of the petition, the debtor transferred non-exempt property with the intent to hinder, delay or defraud creditors, BAPCPA allows the debtor’s homestead to be “surcharged”, i.e., reduced by, the amount of the fraudulent transfer.

D. Retirement Funds: On this issue, the news has been good, with IRA accounts having been found by the U.S. Supreme Court in the case Rousey v. Jacoway to be the equivalent of ERISA-protected qualified pension and retirement plans, and the new Act granting a specific exemption for all forms of retirement. Mirroring this case, under the new Act, all retirements are subject to being claimed as exempt. Under BAPCPA, IRA accounts may be claimed exempt up to $1,245,475 per case. That’s right! Well over a million bucks. It remains unsettled, but it appears that BAPCPA apparently limits the million-dollar IRA to one per case, not one per debtor in a joint case. 

E. What Property is Not “Property of the Estate”: As before, BAPCPA recognizes that certain property of debtors never becomes “property of the estate” if transfer restrictions under applicable non-bankruptcy law prevent the property from being transferred in satisfaction of creditor claims, e.g., ERISA-qualified retirement and pension funds, certain spendthrift trusts (see more below). Two new classes of property have been added to this list: 1) Debtors’ Matching Contributions (Debtor employees’ own contributions, and not merely their employers’ contributions, to ERISA-qualified plans are now fully exempt under BAPCPA); and 2) Educational Accounts (BAPCPA provides for a limited exclusion of funds deposited by a debtor into educational retirement accounts and qualified state tuition programs for the benefit of the debtor’s child or grandchild. The amount which can be claimed exempt is limited to $6,225 deposited more than one year but less than two years before the bankruptcy filing, and an unlimited amount more than two years prior to filing, subject to Internal Revenue Code restrictions on such accounts)

1. Restrictions on Self-Settled Trusts: BAPCPA allows trustees to “avoid”, i.e., set aside, transfers by debtors of property made within 10 years of bankruptcy filing if (1) the transfer was made to a self-settled trust, (2) the transfer was made by the debtor, (3) the debtor is the beneficiary of the trust, and (4) the transfer was made with the actual intent to hinder, delay or defraud a creditor. 

IX.
BANKRUPTCY SET ASIDE POWERS REGARDING MARITAL TRANSFERS INCIDENT TO FAMILY LAW PROCEEDINGS

Although valid and enforceable as between the spouses, the California Supreme Court has made clear that a marital settlement agreement (“MSA”) is not exempt from the Uniform Fraudulent Transfer Act. Interspousal property transfers pursuant to an MSA are subject to set-aside under the UFTA at the behest of defrauded creditors.

In the bankruptcy case In re Beverly , the BAP observed “It is settled California law that a transfer accomplished through an MSA can be avoided as a fraudulent transfer pursuant to UFTA.” As the Beverly court went on to observe:

“The [California] state supreme court noted it is California legislative policy that, in allocating debts to divorcing parties, account be taken of the rights of creditors “so there will be available sufficient property to satisfy the debt by the person to whom the debt is assigned.”

“Moreover, it is also California legislative policy that creditors be protected from fraudulent transfers, including transfers between spouses. Accordingly, transfers before and after dissolution can be avoided as fraudulent transfers. When a court divides marital property in the absence of agreement by the parties, it must divide the property equally, but an MSA need not be equal. From these considerations, the California Supreme Court concluded that divorcing couples do not have “a onetimeonly opportunity to defraud creditors by including the fraudulent transfer in an MSA.” (Citations omitted.)

Thus, while transfers between spouses under the terms of an MSA (or stipulated judgment) are not “cloaked” with impunity simply because approved by a family court, Beverly left unresolved whether all judgments rendered in family law cases are vulnerable to set aside if one of the spouses then seeks relief in bankruptcy and a trustee seeks to avoid a transfer of property ordered in the divorce to recover property for the benefit of the bankruptcy estate. That issue was recently clarified, if not entirely resolved in In re Bledsoe.

In Bledsoe, wife had filed for divorce and husband responded. However, based on wife’s failure to comply with discovery orders, her petition was stricken and husband proceeded to judgment by default prove-up – hardly anyone’s idea of a “contested” proceeding. At prove-up, the family court issued its judgment dividing the marital estate and awarding certain properties to each spouse. However, the following year wife filed for bankruptcy relief, and the trustee appointed in wife’s bankruptcy case sued husband to set aside the property transfers, alleging constructive fraud under the UFTA, asserting that while there was no actual fraud, nevertheless the transfers pursuant to the dissolution judgment were voidable because husband received property of much more value than wife, an allegation husband denied.

The bankruptcy court granted husband’s motion for summary judgment, which the district court affirmed on appeal. The trustee then appealed to the Ninth Circuit, which affirmed, holding that: “…[W]e hold that a state court’s dissolution judgment, following a regularly conducted contested proceeding, conclusively establishes “reasonably equivalent value” for the purpose of § 548, in the absence of actual fraud.” Further, rejecting the trustee’s arguments that such effect should not be given a default judgment, the court held that: “We disagree. A default judgment has “the same solemn character as [a] judgment[ ] entered after trial.” There being no “suggestion of collusion, sandbagging, or indeed any irregularity” in the dissolution proceedings, we hold that the rule applies here.” (Citations omitted)

Clearly, if a default proceeding was treated by the Bledsoe court as a “contested proceeding”, then a regularly conducted trial will enjoy the same treatment. But family law is perhaps like no other field of practice. Issues are often resolved piecemeal, with one issue settled in chambers off the record, others by offers of proof and argument, yet others in full-blown evidentiary proceedings held in open court on the record, with the remaining minor issues resolved in the hallways at the urging of harried family court judges anxious to get to other matters on their busy calendars.

The post Bankruptcy and Family Law Crossover Issues appeared first on Heston & Heston.

These options only apply to vehicles that are financed or leased. If you own a vehicle outright, whether you can keep it depends on how much of the value can be claimed as exempt. Chapter 7 trustees are very reluctant to seek a vehicle turnover since most debtors’ vehicles are not worth much over the claimed exemption. The most common exemptions used are those for vehicles, tools of the trade, and the wildcard.

When someone files bankruptcy and has secured debts, they have to decide what they intend to do with the property that the debt is secured by.

Note: The most common of these secured debts are financed vehicles, but these same options would also apply to other security agreements such as tools and furniture. For the sake of clarity, I will only refer to vehicles.

Reaffirmation

Reaffirmation is the most common option that our clients want to choose in order to keep their vehicle. One common myth about bankruptcy is that you must reaffirm to keep a vehicle through a Chapter 7 bankruptcy, but this is not true. The reaffirmation process starts with the debtor indicating in their bankruptcy documents that they intend to reaffirm the debt. In most cases, the lender will then send our office a reaffirmation agreement, and we will assist our clients with completing the proper forms to be submitted to the court. However, lenders are not obligated to offer reaffirmation.

Pros:

• The only somewhat significant advantage to reaffirming a debt is that it will continue to be reported on your credit, resulting in a credit “boost,” which can be helpful post-bankruptcy. However, the effect of bankruptcy on your credit report is widely misunderstood:
  • Your credit score does not matter unless you are trying to obtain credit.
  • For most people who go into bankruptcy with bad credit, there is no direction for your score to go other than up.
  • If your credit is good when you go into bankruptcy, the negative effect is relatively minimal and short-lived.

Cons:

• Reaffirmation creates a “new” debt which not affected by the bankruptcy. If something happens later on down the line, you will be stuck with that debt and be fully liable for a deficiency. The car could break down, be involved in an accident, or might just become unaffordable.
• Reaffirmation requires that your attorney determine whether they believe that reaffirmation could cause an “undue hardship.” When I am reviewing a reaffirmation agreement, I will consider things like the terms of the reaffirmed loan, my client’s budget, the necessity of the vehicle, and other less burdensome options. If your attorney does not think that reaffirmation is in your best interests, you can request a hearing for your judge to decide. Since judges will weigh the same considerations as your attorney, it is unlikely that a judge would make a different determination. If neither your attorney nor the judge will sign off on the agreement, then you will default to the “ride-through” option if you still want to retain the vehicle.
• Lenders are not required to allow reaffirmation if it is requested, so this may not be an option.

Ride-Through

Ride-through is when you do not reaffirm, do not surrender, but instead voluntarily make payments, allowing you to keep the vehicle. Unlike reaffirmation, your personal liability on the debt will be discharged, and this will not result in a new debt that could come back later to haunt you if you later decide to get rid of the vehicle.

Pros:

• Since ride-through does not create a new debt, you will not be on the hook for a deficiency if you later decide that it does not make financial sense to keep the vehicle and continue making payments. If you decide that you want to get rid of the vehicle, you can contact the lender and arrange for them to pick it up.

Cons:

• Since you no longer have personal liability on the debt, it will not continue to be reported on your credit, and you will not get the credit boost benefit of having a secured debt payment history. It might be possible for you to periodically request that the lender provide you with a payment history to send to the three credit bureaus and potentially have those payments reported.
• Some lenders do not allow for a ride-through – most notably, Ford Motor Credit. If your lender does not accept the ride-through, they may repossess the vehicle even if you are current on payments.

Redemption

Redemption may allow you to keep your vehicle by making a lump sum “redemption payment” in an amount equal to the vehicle’s value, regardless of how much the loan balance is. For example, if a car is worth $10,000, and the loan balance is $25,000, then redemption would allow you to pay $10,000, and you would then own the car outright.

Pros:

• If you are in a situation where you want to keep your vehicle, but the payments are unmanageable, redemption could allow you to pay a reasonable amount for the vehicle.
• If you can make the redemption payment yourself, then you would exit bankruptcy without any vehicle debt.
• Unlike the other options with other options mentioned here, redemption requires filing a motion and proving the vehicle’s value. This will increase the complexity of your case, but in most instances, redemption is completed without delaying the closing of your case by more than a few weeks, if at all.

Cons:

• The redemption payment must be made as a single lump-sum payment relatively quickly after the redemption motion is granted. Most people do not just have thousands of dollars burning a hole in their pocket. It is possible to have that payment financed. However, the interest rates on these redemption loans tend to be very high. You might be able to refinance later on down the line.
• Courts are not in complete agreement with what standard of valuation should be used. Some courts will accept a lower standard, such as trade-in, which will be considerably less than what you would otherwise have to pay if you needed to replace the vehicle. Other courts use a higher valuation standard, such as dealer retail value. For courts that use this higher standard, it just does not make sense to go through the headache and costs of redemption since you could pay the same, or less, at a dealership.

Surrender

Surrendering your vehicle will result in the debt being discharged along with your other unsecured debts. You have several options concerning the timing of when you can surrender your vehicle.

• Surrendering before filing will result in the loan becoming an unsecured debt, and the debt would be listed as such in your bankruptcy petition.
• Surrendering during your case would involve listing the debt as secured and indicating on your Statement of Intention that you wish to surrender the vehicle.
• If you choose to do a ride-through, you can surrender your vehicle at any time after the bankruptcy.

Pros:

• If you do not want to keep your vehicle, this process is straightforward, and you only need to make arrangements for the car to be picked up.

Cons:

• Assuming that you have made other arrangements for transportation, there are no cons to surrendering.

How we approach this

For all of our clients, we will review your options and explain them to you so that you can make an informed decision that meets your needs and goals.

The post How to Handle Financed Vehicles in a Chapter 7 Bankruptcy appeared first on Heston & Heston.

If you have filed a bankruptcy and need to file again, your options are a bit more limited for your second case. Whether you can/should refile now or if it would be better to wait a few years can be a complicated decision and there are different costs and benefits to both approaches.

Your refiling limitations depend on a few factors:

1. Which chapter of bankruptcy you previously filed and which chapter you intend to refile under;
2. Whether you received a discharge in your previous bankruptcy;
3. If you previously filed a Chapter 13 bankruptcy, how much of your debts you paid in that case.

What are the time limits on filing multiple bankruptcies?

Note: All of the time periods mentioned below start running from your case filing dates – not the date you received a discharge or when the case closes.

To better understand the reasoning behind these limitations and how one can successfully navigate them, you should quickly read up on the differences between Chapter 7 and Chapter 13 bankruptcy.

Chapter 7 → Chapter 7

Eight years

Section 727(a)(8) of the Bankruptcy Code states that you cannot receive a discharge in a Chapter 7 bankruptcy if you have previously received a filed a Chapter 7 case in which discharge within eight years. All of the time periods mentioned start running from your first case filing date – not when you received your discharge or when the case closes.

11 U.S.C. §727(a)(8)
The court shall grant the debtor a discharge, unless—the debtor has been granted a discharge under [Chapter 7]… in a case commenced within 8 years before the date of the filing of the petition.

Interestingly enough, this rule originates from the Bible. In fact, the entire concept of bankruptcy has been traced back to a specific passage from the Old Testament:

Deuteronomy 15:1-2 At the end of every seven years thou shalt make a release. And this is the manner of the release: Every creditor that lendeth ought unto his neighbour shall release it; he shall not exact it of his neighbour, or of his brother; because it is called the Lord’s release.

When Congress was drafting the Bankruptcy Code, they apparently thought that God was a little too lenient with seven years, so they upped it to eight years.

Chapter 13 → Chapter 13

Two years

Section 1328(f)(2) of the Bankruptcy Code states that you cannot receive a discharge in a Chapter 13 bankruptcy if you have previously received a Chapter 13 discharge within two years. Again, the time period starts running from your first case’s filing date – not the date you received your discharge or when the case closes.

11 U.S.C. §1328(f)(2)
…the court shall not grant a discharge… if the debtor has received a discharge…in a case filed under chapter 13 of this title during the 2-year period preceding the date of [filing the first Chapter 13].

Most Chapter 13 bankruptcy cases last for 3 to 5 years, so this limitation usually takes care of itself and you could file another Chapter 13 case immediately after your first Chapter 13 case closes. However, you can complete chapter 13 plans within less time, depending on the circumstances.

Being stuck in a Chapter 13 repayment plan for several years and then jumping right back on board for another round does not sound like much fun. However, there are cases where it might make sense to stay in Chapter 13 to manage debts that were either incurred after filing your first case or were not discharged in your first case, such as non-dischargeable student loans. Since the payment amount in a Chapter 13 plan is, in part, determined based on your disposable income, continuing in Chapter 13 might reduce your monthly debt payment obligations to a manageable amount.

For instance, if your student loan payments outside of bankruptcy are $1,000 per month, but your disposable income is $300 per month, you could potentially keep your payments down to $300. You still would not receive a discharge of the student loans, and your loan balance might even grow due to interest, but if you are in a situation where your student loan balance is so high that you will never be able to pay it off, this might be a good option. This strategy is sometimes referred to as “Perpetual Bankruptcy.”

As a side note, some judges do not believe that this is a good faith use of Chapter 13 and could deny your plan’s confirmation on that basis. In the Riverside and Orange County Divisions of the Central District of California, it seems to be unanimously accepted.

Chapter 7 → Chapter 13

Four years

Section 1328(f)(1) of the Bankruptcy Code states that you cannot receive a discharge in a Chapter 13 bankruptcy if you have previously received a filed a Chapter 7 in which you received a discharge within four years.

11 U.S.C. §1328(f)(1)
…the court shall not grant a discharge… if the debtor has received a discharge… in a case filed under chapter 7, 11, or 12 of this title during the 4-year period preceding the date of the order for relief…

However, there is often a substantial benefit in not waiting for the 4-year period to lapse before filing a Chapter 13 after receiving your Chapter 7 discharge. Since Chapter 7 does not discharge certain debts (e.g., mortgages, auto loans, student loans, certain taxes), it may be a good idea to file a Chapter 13 bankruptcy even though you will not receive a discharge at the end of the case. Since your dischargeable debt will be wiped out once you complete your Chapter 7 case, this might make your Chapter 13 much more manageable since you would not need to consider those debts. This strategy is so common that it even has a nickname: “Chapter 20” (because 7 + 13 = 20).

This may be a good strategy if you have a considerable amount of dischargeable unsecured consumer debt (e.g., credit cards, personal loans, medical debt) and you are behind on your mortgage. After you receive your discharge in Chapter 7, you can file a Chapter 13 which will allow you up to 5 years to get caught up on your mortgage.

Chapter 13 → Chapter 7

Six years

Lastly, Section 727(a)(9) of the Bankruptcy Code states that you cannot receive a discharge in a Chapter 7 bankruptcy if you have previously received a filed a Chapter 13 case in which you received a discharge within six years, unless:

1. You paid back 100% of your debts in the Chapter 13; or
2. You paid back at least 70% of your debts in the Chapter 13; your Chapter 13 plan was proposed in good faith; and represented your “best efforts” (i.e., your payments in the Chapter 13 were at least as much as your disposable income).

11 U.S.C. §727(a)(9) The court shall grant the debtor a discharge, unless— the debtor has been granted a discharge under [Chapter 12 or 13]… in a case commenced within six years before the date of the filing of the petition, unless payments under the plan in such case totaled at least— (A) 100 percent of the allowed unsecured claims in such case; or (B) (i) 70 percent of such claims; and (ii) the plan was proposed by the debtor in good faith, and was the debtor’s best effort;

As a general matter, a Chapter 13 repayment plan can pay anywhere from 0% to 100% of non-priority unsecured debts (e.g., not taxes, domestic, child, or spousal support). If you have completed a Chapter 13 plan in which you paid back 100% of your debts, then under subsection (A) the six-year rule does not apply, and you could file a Chapter 7 case anytime after your Chapter 13 case is completed.

Concerning subsection (B), it is already a requirement that a Chapter 13 plan be proposed in good faith [11 U.S.C. §1325(a)(3)] and that you must pay all of your disposable income up to 100% of payment [11 U.S.C. §1322(a)(1), §§1325(a)(1), (b)(1)(B)]. Subsection (B) arguably renders subsection (A) meaningless, and you would not be subject to the 6-year rule so long as your prior case paid at least 70%.

Chapter 11 and 12 Bankruptcy?

I have intentionally omitted references to Chapters 11 and 12 bankruptcy for the sake of readability since these types of bankruptcy are rarely a concern for your everyday consumer bankruptcy filer. Based on a random sample taken from the US Court’s statistics, individual Chapter 11 cases make up less than 0.2% of all bankruptcies, and Chapter 12 “farmer or fisherman” cases are even more rare. However, the rules are pretty simple:

Chapter 11 → Chapter 7 = 8 years [11 U.S.C. §727(a)(8)]

Chapter 12 → Chapter 7 = 6 years, unless 70%-100% [11 U.S.C §727(a)(8)]

Chapter 11 → Chapter 13 = 4 years [11 U.S.C. §1328(f)(1)]

Chapter 12 → Chapter 13 = 4 years [11 U.S.C. §1328(f)(1)]

Chapters 7, 11, 12, 13 → Chapter 11 = no limit [11 U.S.C. §1141(d)]

Chapters 7, 11, 12, 13 → Chapter 12 = no limit [11 U.S.C. §1228]

What to do if you are considering filing bankruptcy again

Taken together, the rules for how often you can file bankruptcy are not as simple as one would hope. In addition to the multiple limitations explained above, one of the requirements of Chapter 7 and Chapter 13 bankruptcy is that you must be coming to bankruptcy in ‘good faith’ [11 U.S.C. §707(b)(3), §1325(a)(3),(7)]. Since this is a very vague concept, it is also subject to the whims of the bankruptcy judge assigned to the case. A person who seeks to file more than one bankruptcy case will undoubtedly be under greater scrutiny and should plan accordingly to consider whether filing bankruptcy again would be their best option. If so, the timing and other factors necessary to be successful in that case.

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Why Would it Be Difficult to Dismiss a Bankruptcy?

Nearly all bankruptcy cases are commenced by the debtor filing a bankruptcy petition with the court. It is possible for the creditors to force someone into a Chapter 7 or 11 bankruptcy involuntarily. However, these involuntary bankruptcies are extremely rare, and only account for 0.05% of all bankruptcy cases, and between 50% to 75% of these cases are dismissed. Additionally, involuntary bankruptcy cases can back-fire on the creditors since the requirements are very strict and failure to meet these requirements can result in severe penalties against the creditors.

So if filing a bankruptcy is voluntary, then why would the debtor not be able to change their mind and just as easily dismiss the case?

Take this example:
We took on a case that was filed by an inexperienced attorney who shall remain nameless. This attorney’s clients lived in a home with no equity, but they also had a rental home with a substantial amount of equity. Their original attorney (not us) claimed the $175,000 California homestead exemption on their personal residence and the rental property despite the fact that you must reside in the property in which you claim a homestead exemption and married couples are only entitled to one homestead exemption that cannot be split. The trustee objected to both of the exemptions and sought turnover of both properties. That is when we substituted into the case and took over representing the Debtors and, by converting their case to one under Chapter 13, our clients were able to save both properties.

Ideally, these debtors would have voluntarily dismissed their case, rearranged their financial and asset situation, and then re-file at a point in time where they would not stand to lose their properties (this process is often referred to as “exemption or pre-bankruptcy planning”). This would have resulted in no loss of property, no payment to creditors, and it would have been a simple open-and-shut case. However, a motion to dismiss in their situation would require a showing that dismissal is in “the best interests of creditors”. Clearly, this could not be shown as a sale of one or both of the properties would have resulted in a substantial payment to creditors. So the only thing that could be done is to try and mitigate the damage caused by our clients’ former attorney which we were able to do by converting their case to one under Chapter 13.

Although the primary purpose of bankruptcy is to allow debtors to obtain a discharge and/or reorganize debts, there are some facets of bankruptcy law that are aimed toward balancing the equities, sometimes in favor of creditors. If there was an absolute right to dismissal, then in any case where there was some flaw with the filing or some other reason that the debtor would prefer for the case to end (for instance, when the case will result benefit to creditors at the debtor’s detriment), then these situations could be easily avoided by simply dismissing the case and then figuring out a different course of action to take.

Chapter 13 Bankruptcy Dismissal

Unlike Chapters 7 and 11, a Chapter 13 case is purely voluntary and a person cannot be forced into it nor can they be forced to remain in it. One reason for this is that Chapter 13 bankruptcy is defined by the monthly payments derived from a person’s income. Since the 13th Amendment prohibits involuntary servitude (aka, slavery), then forcing someone to work in order to make those payments would constitute a violation of this right. When the Bankruptcy Reform Act of 1978 was making its way through Congress, it was noted:

“[t]hough it has never been tested in the wage earner context, it has been suggested that a mandatory chapter 13 plan, by forcing an individual to work for creditors, would violate this prohibition [against involuntary servitude].”

H.R.Rep. 585, 95th Cong., 1st Sess. 120 (1977)

In general, the process for dismissing a Chapter 13 case is extremely simple and only involves filing a two-page motion for voluntary dismissal which is usually granted almost immediately.

However, this right to dismiss is not absolute. Dismissal of a Chapter 13 case can be denied when the case was originally filed as a Chapter 7 case and then converted to Chapter 13, or where the dismissal is sought in “bad faith”.

Conversion from Chapter 7 or 11 to Chapter 13 is also relatively simple and only requires filing a different 2-page form. If there was an absolute right to dismissal of a Chapter 13 case, this would allow people to side-step the difficulties of dismissing a Chapter 7 or 11 case by filing a simple motion to convert to Chapter 13, and then turning around and filing a simple request for voluntary dismissal of that Chapter 13 case.

In short, there is a good faith right to dismiss a Chapter 13 case when that case is initially filed under Chapter 13. However, when a case is converted to Chapter 13, the right is not absolute and that person can be forced back into Chapter 7 or 11.

The Best Interests of Creditors

In order to dismiss a Chapter 7 or 11 case, you must file a motion explaining how dismissal would be in the best interests of creditors. Since in most cases, especially Chapter 7 cases, creditors receive no payment or other benefit, then dismissal without a discharge would almost always be in their best interests. However, if you are in one of those situations where creditors stand to receive a benefit in your case, then the “best interests of creditors” test weighs against dismissal and it is likely that your case cannot be voluntarily dismissed quite so easily.

Automatic Dismissal?

Although voluntarily dismissing your case requires taking the affirmative step of filing a motion requesting this, there are instances in which dismissal may occur involuntarily and automatically. The two most common are by failing to file required documents or failing to appear at your 341(a) Meeting of Creditors.

However, one must tread lightly here. Even if a debtor fails to do one or both of these, the case might not be automatically dismissed if a party were to raise the issue and then that person can be forced to file these documents and appear for an examination or give testimony. This situation typically arises when a creditor is aware of the existence of assets that the Chapter 7 trustee could sell and pay dividends to creditors. Additionally, attempting to pull this trick can be seen as bad faith and could potentially result in denial of discharge, meaning that not only will you be forced to lose your property, but you will also not receive a discharge of any debts that are not paid by your loss of that property.

How to Avoid Being Forced to Stay in Bankruptcy

The way to avoid being in a situation where you are forced to stay in bankruptcy against your will is to seek the counsel of experienced bankruptcy attorneys who will know how a case will play out before it is filed.  In most situations where a person would lose property or suffer other adverse consequences if they were to urgently file their case, this can be avoided by pre-bankruptcy planning to delay their case in order to maximize their success in a bankruptcy case that is filed later on down the line.  Pre-bankruptcy planning includes filing at the most optimal time and minimizing risk of loss of property, something which an experienced bankruptcy attorney can assist with.

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In order to understand what the Office of the United States Trustee is and does, they have posted on their website the following information about the program:

THE UNITED STATES TRUSTEE

The United States Trustee Program

The United States Trustee Program is a component of the Department of Justice that seeks to promote the efficiency and protect the integrity of the Federal bankruptcy system.  To further the public interest in the just, speedy and economical resolution of cases filed under the Bankruptcy Code, the Program monitors the conduct of bankruptcy parties and private estate trustees, oversees related administrative functions, and acts to ensure compliance with applicable laws and procedures.  It also identifies and helps investigate bankruptcy fraud and abuse in coordination with United States Attorneys, the Federal Bureau of Investigation, and other law enforcement agencies.

Background of the U.S. Trustee Program

The Program was established by the Bankruptcy Reform Act of 1978 (11 U.S.C. § 101, et seq.) as a pilot effort encompassing 18 districts. It was expanded to 21 Regions nationwide, covering all Federal judicial districts except Alabama and North Carolina (see Note below), by enactment of the Bankruptcy Judges, U.S. Trustees, & Family Farmer Bankruptcy Act of 1986 (Pub. L. 99-554, 100 Stat. 3088, reprinted in part at 28 U.S.C. § 581, note). The Program is funded by the United States Trustee System Fund, which consists primarily of fees paid by parties and businesses invoking Federal bankruptcy protection.

The primary role of the U.S. Trustee Program is to serve as the “watchdog over the bankruptcy process.”As stated in the USTP Mission Statement:

The mission of the United States Trustee Program is to promote the integrity and efficiency of the bankruptcy system for the benefit of all stakeholders – debtors, creditors, and the public.

See further…
Program Mission:
U.S. Trustee Program Mission
The mission of the United States Trustee Program is to promote the integrity and efficiency of the bankruptcy system for the benefit of all stakeholders – debtors, creditors, and the public.

U.S. Trustee Program Vision
The United States Trustee Program carries out its enforcement, regulatory, and administrative responsibilities to enhance the integrity, efficiency, and operational excellence of the bankruptcy system for the benefit of all stakeholders – debtors, creditors, and the public.

U.S. Trustee Program Core Values
Integrity. We will be professional and adhere to the highest ethical standards.
Fairness. We will be impartial and honest in faithfully performing our statutory duties and responsibilities.
Respect. We will treat others with dignity.
Excellence. We will enhance the effectiveness and efficiency of our service.
Accountability. We will continuously measure and improve our performance and results.

U.S. Trustee Program Goals
1. Protect the integrity of the Nation’s bankruptcy system.
2. Promote effectiveness and efficiency within the Nation’s bankruptcy system.
3. Maintain operational excellence that achieves desired results through continuous improvements in field operations, administration, information technology, planning and evaluation, and diversity.

The Attorney General is charged with the appointment of United States Trustees and Assistant United States Trustees. The Executive Office for U.S. Trustees (EOUST) in Washington, D.C., provides general policy and legal guidance, oversees the Program’s substantive operations, and handles administrative functions. The Director of the Executive Office, whose authority derives from the Attorney General, oversees a staff comprised of the Offices of the Director, General Counsel, Criminal Enforcement, Administration, Oversight, Planning & Evaluation, and Information Technology. The Executive Office also provides administrative and management support to individual U.S. Trustee Offices in their implementation of Federal bankruptcy laws. See 28 U.S.C. §§ 581-589a.

Principal U.S. Trustee Duties under the Bankruptcy Code

United States Trustees supervise the administration of the following cases filed under the Federal Bankruptcy Code:

• Liquidation proceedings under Chapter 7: — In Chapter 7 “liquidation” proceeding, those assets that are not exempt from creditors are collected and liquidated (reduced to money). The proceeds are distributed to creditors by a private trustee appointed to administer the debtor’s estate under Chapter 7 (see generally 11 U.S.C. §§701-704). An eligible debtor may receive a “discharge” from his or her debts under Chapter 7, except for certain debts that are prohibited from discharge by the Bankruptcy Code.
• Reorganization proceedings (usually business-related) under Chapter 11: — Chapter 11 offers a procedure by which an individual or a business may attempt to “reorganize” its debts while continuing to operate. The vast majority of Chapter 11 cases are filed by businesses. The debtor, often with the participation of creditors, creates a reorganization plan under which to repay all or part of its debts. The “debtor in possession” may generally continue business operations pending reorganization, unless a trustee is appointed under Chapter 11 (see, e.g., 11 U.S.C. §1104).
  • Section 1930(a)(6) of the U.S. Code (28 U.S.C. §1930(a)(6)) prescribes “quarterly fees” that are to be paid in each Chapter 11 case to the U.S. Trustee Program. In essence, quarterly fees accrue throughout the pendency of a Chapter 11 reorganization case (i.e., until the case is closed, dismissed, or converted to another chapter) and are payable on a quarterly basis, 30 days following the end of each calendar quarter. “The amount of the quarterly fee [is] calculated according to a graduated scale based on the total sum of disbursements” as specified in §1930(a)(6), and “disbursements” include all pre- and post-confirmation payments made by or on behalf of the debtor, including routine operating expenses. See, e.g., Tighe v. Celebrity Home (In re Celebrity Home Entertainment, Inc.), 210 F.3d 995 (9th Cir. April 21, 2000). For more information regarding Chapter 11 quarterly fees, please contact the Office of the United States Trustee in the judicial district where the case was filed.
• Family farm and fisherman reorganization proceedings under Chapter 12: Chapter 12 allows an eligible family farmer or a fisherman to file for bankruptcy, reorganize the business’ affairs of the farm or fishing business, repay all or part of the business’ debts, and continue operating. A “standing trustee” appointed by the United States Trustee under 28 U.S.C. §586(b) typically serves as the trustee of the debtor’s estate pending fulfillment of the debtor’s repayment obligations under a plan confirmed by the U.S. Bankruptcy Court where the case was filed.
• “Wage-earner” reorganization proceedings under Chapter 13: Chapter 13, often called wage-earner bankruptcy, is used primarily by individual consumers to reorganize their financial affairs under a repayment plan that must be completed within three or five years. To be eligible for Chapter 13 relief, a consumer must have regular income and may not have more than a certain amount of debt, as set forth in the Bankruptcy Code. A “standing trustee” appointed by the United States Trustee under 28 U.S.C. §586(b) typically serves as the trustee of the debtor’s estate pending fulfillment of the debtor’s repayment obligations under a plan confirmed by the U.S. Bankruptcy Court where the case was filed.

Specific responsibilities of the United States Trustees include:

• Appointing and supervising private trustees who administer Chapter 7, 12, and 13 bankruptcy estates (and serving as trustees in such cases where private trustees are unable or unwilling to serve);
• Taking legal action to enforce the requirements of the Bankruptcy Code and to prevent fraud and abuse;
• Referring matters for investigation and criminal prosecution when appropriate;
• Ensuring that bankruptcy estates are administered promptly and efficiently, and that professional fees are reasonable;
• Appointing and convening creditors’ committees in Chapter 11 business reorganization cases;
• Reviewing disclosure statements and applications for the retention of professionals; and
• Advocating matters relating to the Bankruptcy Code and rules of procedure in court.

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It is estimated that 50% of all marriages end in divorce. Studies of what triggers bankruptcy uniformly find that the financial impact of a divorce is one of the most frequent causes, along with loss of employment or substantial medical expenses.

But unlike the types of general unsecured debts like credit cards, loans, and medical services, debts that result from divorce proceedings are treated quite differently in the bankruptcy process. Deciding whether to seek bankruptcy protection is always a difficult decision to be undertaken with care. When a debtor is confronted with debts that may be primarily the result of a divorce, it is crucial to thoroughly analyze the nature of these debts and whether bankruptcy would resolve them.

Child & Spousal Support / Marital Debts

While there is a general presumption that debts are dischargeable in bankruptcy, certain debts are not subject to discharge. For example, recent tax debt, criminal penalties and fines, and most student loan debts are not dischargeable. But there are exist special rules for debts that result from divorce litigation.

It has long been the rule that debts for payment of child support or alimony cannot be discharged in bankruptcy. But what about debts incurred that are “in the nature of support”?

For example, a debt resulting from a promise to make payments for an estranged spouse’s apartment or car? After all, promising to pay the car payment or rent of a spouse directly, rather than pay alimony to be used for those needs, serves the same purpose. For that reason, numerous cases uphold the non-dischargeability of such promises that serve the equivalent function of spousal or child support.

But what about debts owing to third parties or entities that do not substitute for direct support needs? Generally, an order to pay for a former spouse’s legal fees because of the disparity of income has also been held to be in the nature of support. In other words, if the spouses have considerably different incomes and therefore unequal access to legal representation, an order for payment of attorney fees in order to “level the playing field” because of the income disparity has been held to be also in the nature of support. These fee-shifting orders can also include orders to pay for child custody evaluators, minors’ counsel, and others where the payment serves to promote the children’s welfare and needs.

Until the mid-1980s, debts that were not in the nature of support arising in divorce litigation were given no special treatment or protection. But for the past 30+ years, an additional category of nondischargeable claims arising from family law litigation has been given protection against discharge. These debts, characterized as “marital debts,” must arise from the divorce litigation or settlement agreements reached in connection with such litigation. But they also must not be for or in the nature of support, which would already make them nondischargeable. Also, the debts must be payable to the estranged or former spouse. If payable to others, such as credit card companies or former in-laws, such debts are dischargeable. Like support obligations, these marital debts are non-dischargeable in bankruptcy cases filed under Chapters 7, 11, and 12.

Chapter 13 “Super Discharge”

However, these marital debts that are not in the nature of support can be discharged in a case filed under Chapter 13. Traditionally, the discharge awarded upon completing a Chapter 13 plan is somewhat broader than the discharge awarded in other chapters. This broader discharge is colloquially known as a “super discharge.” It was Congress’s view that those who endeavor to repay all or a portion of their debts in Chapter 13 are entitled to greater relief. After all, the Chapter 13 debtor labors to make payments into a plan for a term ranging between 36 and 60 months. Thus, if the confirmed plan based upon the debtor’s best efforts pays only 50% of the general unsecured claims, the Chapter 13 discharge will nonetheless serve to discharge the remaining unpaid balance of those debts, including the marital debt.

When considering what chapter will provide the most significant relief, debtors emerging from contentious and costly family law litigation may want to consider the benefits of proceeding in Chapter 13 if the divorce has resulted in substantial marital debt. Additionally, debtors who have fallen behind in meeting their support obligations may find that Chapter 13 offers protection while formulating the plan to “catch up” with child support or alimony arrearages, which cannot be discharged but can be paid out over time under the Chapter 13 plan. In such a situation, the debtor need only make the current support payments, and the accumulated arrearages are paid off over time through the plan.

Bankruptcy is an option for those who have encountered unforeseen calamities that have dashed expectations and undercut abilities to stay current with debts. But depending on the nature of the debts, careful consideration needs to be given to choosing the most appropriate relief, whether it be a Chapter 7 case or a Chapter 13 case. Such a determination should only be made after consulting with counsel qualified to advise clients concerning the interplay between bankruptcy law and family law.

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Table of Contents

• What is a judgment lien?
• Determining whether a lien can be avoided
• Examples
• Lien Avoidance Calculator
• How to avoid a lien in bankruptcy
• Preparing the motion
• Filing and obtaining an order
• Avoiding a Liens in a Closed Case
• Avoiding a Lien on Sale Proceeds
• Lien Avoidance in Chapter 13

What is a judgment lien?

A bankruptcy discharge will wipe out your personal liability on a judgment so long as the debt is dischargeable. Some relatively common non-dischargeable debts are those for taxes and child or spousal support. Since you no longer are personally liable for the debt, a creditor will not be able to collect against you personally by wage garnishments, bank levies, or other enforcement actions. However, if a creditor records an abstract of judgment, that debt will become secured against your home and will survive bankruptcy unless the lien is “avoided.”

Secured debts like this will survive the discharge unless you file a motion to avoid the lien. If this motion is not filed, if you were to sell your home, the creditor would receive a cut of the proceeds to satisfy the debt even though they could not collect against you personally. A particularly aggressive creditor could also request that the county sheriff force the sale of your home.

Determining whether a lien can be avoided

Whether you can avoid a judgment comes down to simple math. There are four essential facts that you will need to know, all of which are determined as of the date your case is filed – not when the motion is filed:

• The value of your home
• The balance on your mortgage
• The amount of your exemption
• The amount of the judgment
  

The value of your home and mortgage balance will determine the amount of equity in the property. The amount of exemption will determine how much of that equity is protected. And lastly, the amount of the judgment will determine how much debt, if any, will remain after the motion is granted.

The most common exemption used in these motions is the homestead exemption which, as of January 2021, is between $300,000 and $600,000 in California. However, if your case was filed before January 2021, you will have to utilize the old exemptions. These exemptions were $75,000, $100,000, and $175,000, depending on whether you filed as single, a family unit, or over 65+ or disabled.

Since you are entitled to your full exemption, the motion to avoid lien will reduce the amount of the lien to the extent that this exemption is impaired. The easy way you can think of this is that the exemption will go in between the mortgage and the judgment. If the exemption fully protects your equity, then the lien will be completely wiped out. If there is some equity that is not protected, then the judgment lien will be reduced to that amount.

Example #1 – No unprotected equity

• Value of property = $500,000
• Mortgage balance = $200,000
• Exemption = $400,000
• Judgment = $500,000
  

Since the equity in the property is $300,000, and the exemption is $300,000, then all of the equity is protected and the judgment will be completely wiped out.

Example #2 – Some unprotected equity

• Value of property – $500,000
• Mortgage balance = $200,000
• Exemption = $100,000
• Judgment = $500,000
  

Since the equity in the property is $300,000, and the exemption is $100,000, then the judgment will be reduced to the remaining $200,000

Example #3 – Upside-down property

• Value of home: $300,000
• Mortgage balance: $400,000
• Exemption: $1 (yes, just one dollar)
• Judgment: $500,000
  

Even though there is no equity, you still must claim an exemption since that is one of the essential elements. Since there is no equity in the property, and you have that $1 exemption, then the lien will be completely wiped out to ensure that your exemption is not impaired.

Motion to Avoid Lien Calculator

How to avoid a lien in bankruptcy

Preparing the motion

You may file a motion to avoid lien at any time during your case. In the Central District of California, the Court has provided an optional form that addresses the most common lien avoidance situations. However, some less common situations will require a more custom-tailored motion to address those other issues. The facts that you will need to prove in the motion include the following:

• Value = an appraisal of the property as of the date the case was filed
• Mortgage = a mortgage statement
• Exemption = a copy of your Schedule C list of exemptions
• Judgment = a copy of the abstract of judgment

It is also a good idea to include declarations to include additional evidence and ensure that all of the evidence presented is admissible. You may need to state the exact procedure you followed to obtain the mortgage statement and abstract of judgment to “authenticate” these documents. Additionally, although most appraisals will include a statement that the appraiser affirms under penalty of perjury that the contents are true and correct, some do not contain this language. If the appraisal does not include this affirmation, you will need to draft a separate declaration for the appraiser to sign.

Filing and obtaining an order

Once you’ve assembled these documents and filed them with the court, you will need to serve the motion on the creditor who has the lien, and they will have 14 days to oppose the motion.

If the creditor does not file a response, you can file a declaration stating this and then submit an order to the judge. If the creditor does file an opposition, you will need to file a response addressing the issues they have raised. This entire process can become a lot more complex once the motion is opposed.

Once you have the signed order, you will need a certified copy of the order obtained from the bankruptcy court clerk’s office. You will then need to record the order by providing the certified copy to the county recorder.

Avoiding a Lien in a Closed Case

If your case is already closed, you can still file a motion to avoid the lien, but you will first need to request that the court reopen the case. Courts will almost always grant these motions so long as you can clearly explain why you are opening the case and that there is a likelihood that you will be successful with your motion. To show that you will likely be successful, you may want to highlight the essential elements described above.

Since these essential elements are determined as of the date your case is filed, you will need to do a bit of extra work to obtain these facts. You will need a mortgage statement from when your case was filed and an appraisal showing your home’s value from when the case was filed. These appraisals are known as “historical” or “retroactive” appraisals. Everything else is the same as if you were to file the motion when your case was originally open.

Avoiding a Lien on Sale Proceeds

It is relatively common that a judgment lien is not discovered until someone is in the process of selling their home. Since the timeline of reopening a case and filing a motion to avoid a lien will take around a month or more, this delay would put the sale at risk of falling through.

In a case that Halli Heston of our firm brought to the Ninth Circuit Court of Appeals, this was the situation our client faced. Culver, LLC v. Chiu (In re Chiu), 304 F.3d 905 (9th Cir. 2002). The Court reasoned that although the lien attached to the proceeds of the sale, since the exemption would also transfer to these proceeds, the analysis was the same and the lien could be avoided.

In most situations like this, the sale will close, and the escrow company will hold the funds that would otherwise go to the creditor in the absence of a lien avoidance. Once the motion is granted, a certified copy of the order will need to be provided to the escrow company to release the funds.

Lien Avoidance in Chapter 13 Bankruptcy

In a Chapter 13 case, the usual procedure for avoiding liens is that the motion will be filed at the onset of the case and follow the same basic procedures as applicable in Chapter 7. However, once the motion is granted, the lien will be converted to unsecured debt and join the other unsecured creditors. Since the unsecured creditors in Chapter 13 are not entitled to any certain amount of payment, the actual amount the creditor receives may be minimal, if anything. 

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CCP section 704.730 provides for a $100,000 homestead exemption for a “family unit” if the debtor or the debtor’s spouse who resides in the homestead is a member of a “family unit” and:
At least one member of the “family unit” owns no interest in the property; OROne family unit member’s sole interest in the property is a community property interest with the debtor.However, CCP § 704.710 defines a “family unit” to include, among other situations, as “the debtor and his or her spouse, if they reside together in the homestead.” As the statute specifically uses the language “reside together in the homestead” it would be inferred by statutory interpretation that the inclusion of one thing implies the exclusion of another and that a married couple where only one spouse lives in the homestead would not be considered a “family unit” for purposes of determining a right to claim an increased homestead exemption.

CCP § 704.720(d) states: “If a judgment debtor is not currently residing in the homestead, but his or her separated or former spouse continues to reside in or exercise control over possession of the homestead, that judgment debtor continues to be entitled to an exemption under this article until entry of judgment or other legally enforceable agreement dividing the community property between the judgment debtor and the separated or former spouse, or until a later time period as specified by court order.”

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