The Florida Bankruptcy Law Blog

Leasing Portion of Homestead Land To Third Party Does Not Impair Exemption

Jonathan Alper — 2009-06-30T21:01:35-04:00

I came upon another interesting court decision concerning Florida homestead. In this bankruptcy case a debtor owned a property in the county less than 160 acres. The debtor placed two mobile homes on the property. He lived in one mobile home and he rented the other mobile home and surrounding land to a third party for about $400 per month. Both mobile homes were attached to sewer and water lines. The debtor claimed the land and both mobile homes as exempt under Florida’s homestead provisions. The bankruptcy trustee objected to the exemption of that portion of the property used by the tenant and his rented mobile home. The bankruptcy judge overruled the objection and sustained the exemption of all of the debtor’s property.

The court noted that prior judicial decisions protected portions of homestead land used for the owner’s commercial purposes. Those cases did not address a situation where the owner rented part of the homestead land as well as a mobile home thereon. The bankruptcy court found that the debtor’s lease of part of his homestead property did not disqualify any part of his homestead exemption. The judge said that the result may be different if the homestead was located within a municipality because the Constitution limits the exemptions in a city to the owner and the owner’s family. The case is 08-3203-3F3 In re Oullette

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Chapter 7 Trustee Goes After 2009 Prospective Tax Refunds

Jonathan Alper — 2009-06-26T09:43:59-04:00

Bankruptcy trustees may be more aggressively seeking your income tax refunds. Tax refunds are non-exempt money in most bankruptcy cases. If you file bankruptcy during the first four or five months of the calendar year, and you are due or expecting a tax refund for the prior tax year, the trustee will take your tax refund. The asset at issue is the refund that was due the debtor at the end of the prior year, based on the prior year’s income and withholding, to be reported on the income tax return. I have received emails from two attorneys reporting that a Chapter 7 trustee at a creditor meeting has required that the debtor pay the trustee the year-to-date portion of the debtor’s expected tax refund for 2009, even though the tax return is not due until next year and the amount of refund is not set until the end of the tax year.

The trustee has the right to the debtor’s 2009 tax refunds. There are several bankruptcy cases holding that at any time a debtor’s tax refund is property of the bankruptcy estate. The refund must be prorated so that only the refund attributable to the time prior to filing the petition is estate property. The law does not limit the trustee’s rights to prior years tax returns so that the trustee may go after your 2009 refund even though the tax year is not over. The issue is how to determine the amount of the 2009 refund before the end of the year. Many factors between the bankruptcy filing date and the end of the year may increase or decrease the debtor’s tax refund. A debtor may defend a trustee’s reach for current year tax return on the basis that the amount of refund is speculative until the return is filed next year. Most trustees will not want to keep open a large number of current bankruptcy cases until debtor’s tax returns are filed sometime in 2010. It will be interesting to see how bankruptcy courts handle this type of trustee collection effort.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Bankruptcy Court Exempts Homestead Property Used For Debtor's Business

Jonathan Alper — 2009-06-22T23:23:17-04:00

Homestead protection applies to homes and land occupied by a debtor as his primary residence. Property used for commercial purposes or for the production of income generally does not qualify for homestead protection. A Florida bankruptcy court recently considered married joint debtors who used part of a homestead property for his residence and part of the same property for business and income production. The issue was whether the partial business use disqualified all or part of the debtors’ homestead protection from their judgment creditors. The two debtors owned a five acre parcel of land in the county. They built their residence on a minority portion of the land. The debtors had two more buildings on the same land. One building was a warehouse used exclusively for the debtors’ business. The third building was a second residence rented to an unrelated third party. In other words, two of the three structures occupying most of the property were used commercially.

The bankruptcy court held that the entire land and all three structures were protected from the debtors’ creditors in his bankruptcy proceeding and were not subject to administration as part of the bankruptcy estate pursuant to the homestead exemption.. The court found that the Constitutional homestead clause does not disqualify a homestead because the owner uses the property commercially or for the production of rental income. The court said that, the "Debtors’ commercial use of the Building (rental) and the Warehouse does not preculd them from claiming the entirety of the Real Property as exempt." The court recognized that other bankruptcy courts reached opposite conclusions in earlier cases. The case is: In re: Earnest, Case No. 08-4408-3F7.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Resulting Trust Theory Can Protect Asset Titled With Parent For Estate Planning Purposes

Jonathan Alper — 2009-06-19T12:02:48-04:00

In the past week I received similar questions from three prospective bankruptcy debtors about assets owned jointly with their parents. In each instance, the parent had added the debtor/ child to the parent’s deed, bank account, or CD for estate planning purposes so that the child would immediately have access to the asset upon the parent’s death. I have written previous posts that discussed the problems with joint ownership between parent and child. My guess is that most bankruptcy attorneys tell their clients that when a parent adds a child’s name to the parent’s asset for estate planning the child will lose at least part of the asset if the child files Chapter 7 bankruptcy because the child will be deemed to own part of the land or financial asset. This is not always the case. One of my clients had me research the issue where the parent purchased a house, paid off the mortgage, and then added her child to the title for estate planning purposes.

There are several Florida bankruptcy cases which hold that when a debtor’s name is own the legal title to an asset, which asset was purchased by a parent for the parent’s exclusive use, the debtor is considered to hold their share of legal title in "resulting trust" for the parent. The asset is not part of the debtor’s bankruptcy estate even if the debtor’s name is on the title. The analysis is based on the facts of each case. A result trust is implied under Florida law when the parties intend for one person to have exclusive equitable ownership and control of an asset and the other party claims nothing more than bare legal title. Courts have found a resulting trust when the parent paid exclusively to purchase the asset, exclusively used the asset, and exclusively paid expenses of ownership such as taxes, maintenance and repairs. In such circumstances, courts have said that it would be inequitable for the child debtor’s creditors to attack the parent’s property just because the parent inadvertently added the debtor’s name to the title for estate planning. Many bankruptcy debtors have this issue, and these people should make sure their bankruptcy attorney is familiar with the concept of resulting trust.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

The Effect of Bankruptcy Or Foreclosure On Your Ability To Qualfiy For Your Next Home Mortgage

Jonathan Alper — 2009-06-10T18:00:46-04:00

One of my recent clients works as a supervisor in the mortgage lending department of a national bank. Many people asked me about the impact of bankruptcy and foreclosure on their credit. I asked this client how many years does someone have to wait to get a new mortgage after either filing Chapter 7 bankruptcy or a foreclosure judgment. My client said that during the real estate boom a bankruptcy or foreclosure meant no mortgages for two years. In today’s lending environment, mortgage companies are not giving new loans to anyone who either filed bankruptcy in the past four years or who had a foreclosure judgment in the prior five years. It does not matter how much cash the debtor can invest in the new home- no mortgages are available during these periods regardless of the down payment and loan to value ratio. She expected that these requirements will be relaxed somewhat when the real estate market stabilizes.

My client offered advice for people considering bankruptcy. The client suggested that debtors maintain after bankruptcy one or two credit cards that have low balances and for which the debtor is current on payments. If people remain current on some credit cards following bankruptcy (or foreclosure) their credit scores will rebound relatively quickly. Then, if credit loosens up as the economy recovers the people with good credit will more quickly qualify for mortgage or consumer loans.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

HOA Fees Liability After Bankruptcy

Jonathan Alper — 2009-06-09T21:34:24-04:00

I read an interesting blog post about liability for homeowners association fees after filing Chapter 7 banrkuptcy.I still owe HOA Fees after I filed Bankruptcy and Surrendered my Home? : Bankruptcy Law Network. The new bankruptcy law does not discharge the debtor's liability for debts to an HOA. The author states that as a practical matter debtor's have little to worry about. His reasons and advice to clients is explained in the blog post.

Bankruptcy's Effect On Credit Score: Lender Rebuts Common Myths

Jonathan Alper — 2009-06-02T18:19:57-04:00

Bankruptcy debtors often worry about the effect of a bankruptcy on their credit rating and their ability to finance new cars and homes after filing bankruptcy. The consensus opinion of my clients is that a Chapter 7 bankruptcy ruins your credit and that a Chapter 13 bankruptcy has less adverse impact on credit. One of my clients this week owns a company that buys automobile finance contracts. This client is not filing bankruptcy. His company purchases debt from other companies making sub-prime auto loans, companies such as buy-here-pay-here lots and payday loan businesses. He says that the debt packages he buys always includes loans made to people with prior bankruptcies. He knows the effect of bankruptcy on credit ratings. He told me there are two prevailing myths about bankruptcy and your credit score.

The first myth is that Chapter 7 bankruptcy always destroys your credit. He says the main credit factor following bankruptcy is the debtor’s debt history just prior to filing bankruptcy. If the debtor files early, when he first anticipates financial problems, the debtor may then be current on all debt accounts. If there are no, or few, delinquencies on the filing date, the bankruptcy will have no adverse effect on credit. In fact, my client said, that the bankruptcy will improve those debtor’s credit ratings because it will improve their income/debt ratios. The client says that debt/income is more important than bankruptcy for credit score. If, as too often happens, debtors avoid bankruptcy until they are seriously delinquent on their debt accounts the bankruptcy will not improve, and may hurt, the debtor’s credit rating. The bankruptcy debtor’s credit will suffer more from pre-filing delinquencies than from the bankruptcy itself. The lesson is to file bankruptcy when your accounts are still current.

The second credit myth is that Chapter 13 has less impact on credit than Chapter 7 because the debtor is repaying some of his debt. My client stated that lenders are less likely to finance debtors in Chapter 13 because the debtor has not eliminated his debts and usually has still a below standard debt/income ratio. The fact that the Chapter 13 debtor is repaying his debts in the bankruptcy does not convince my client’s lenders to provide preferred financing.

Some callers ask me if they have to be delinquent a specific number of months on their unsecured debt in order to qualify for Chapter 7 bankruptcy. The answer is "no" and based on this client’s experiences in the lending industry the more you wait for bankruptcy the worse is its impact on credit.

Resulting Trust Theory Used To Exclude From Bankruptcy Assets Titled In Debtor's Name

Jonathan Alper — 2009-05-28T17:25:39-04:00

Parents often add their children to the parent’s bank accounts or real estate title so that the child can use the assets for the parent’s benefit in the event of the parent’s disability or to avoid probate upon the parent’s death. Parents sometimes place their names on car titles for their younger child’s automobile so that the child can get better financing or insurance rates. For these, and many other reasons, people sometimes have partial ownership of assets paid for and used by other family members. This joint titling of family assets is a problem when one of the family members in my examples files bankruptcy and has to list all assets in his name. The debtors in my examples would have to list their parents bank accounts and real estate (in the first example) and their child’s car (in the second example) on their bankruptcy petition. The trustee could pursue these assets and seek a forced sale with a division of sale proceeds between the bankruptcy estate and the family co-owner.

Debtors who find themselves defending claims against assets titled in their name for the benefit of a non-debtor family member have defenses against trustee claims. One theory used to protect these assets in bankruptcy is the concept of "resulting trust." A recent opinion of a Florida bankruptcy court stated that real property held in the debtor’s name to help out a non-debtor family member was not part of the debtor’s bankruptcy estate because the debtor owned the asset in a resulting trust for the other family member. The court said that a resulting trust arises by implication of law and is founded on the presumed intention of the parties that the one party who pays for an asset has the beneficial and the party holding title, or joint title, who has not contributed to the purchase financial is holding title for convenience or other collateral purpose. When one person furnishes money to acquire property to be held in the name of another where both parties intend that the legal owner owns the property for the other’s benefit a resulting trust is created. Case is: In re Todd. Adv. No. 07-1149, Case No. 06-16898-BKC-JKO.

The resulting trust concept is useful to explain why a bankruptcy debtor holds legal title to assets funded by a non-debtor family member. A debtor who has full or part legal title to an asset at the request of, or for the benefit of, another person may be able to exclude the asset from the bankruptcy estate by raising resulting trust as a defense to trustee claims.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Can Small Business Survive Owner's Personal Bankruptcy?

Jonathan Alper — 2009-05-27T19:12:15-04:00

Many bankruptcy clients during the current recession own a small businesse, and they are concerned about the impact of their personal bankruptcy on their business. Can they continue to own and operate their small business while filing personal bankruptcy to discharge personal credit card and other unsecured debts. In most cases, their business will survive. In a typical business-owner bankruptcy the debtor’s business is not providing enough income to service the owner’s personal debts. The business may have customers and a few assets, but the business usually also has debts owed to suppliers and the business landlord. Most small business weakened by the recession are technically insolvent because whatever assets it owns is less than its liabilities. In a personal bankruptcy the debtor’s "business assets" is not those assets owned by the business; the owner’s asset is his stock or other interest in the business. If the owner states that his interest in his own business has no market value, then the debtor lists his stock on his individual petition at zero.

If an independent third part would not pay to purchase the debtor’s interest in the business, then the bankruptcy trustee likely is not going to be able to liquidate the stock and would not anticipate recovering from the business any money to pay the debtor’s personal creditors. The trustee will not pursue the debtor’s stock in his business if the stock has no value. If a bankruptcy trustee does not want the stock for benefit of the creditors, the debtor may retain his stock and continue to operate his business. Of course, the business’ own creditors can pursue assets owned by the business. The debtor’s individual bankruptcy does not stop business creditors, provide the business creditors cannot pursue the debtor personally. Nevertheless, if the business can make money to survive after the debtor’s personal bankruptcy, the debtor would retain the benefit therefrom.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Bankruptcy Sometimes Involves Luck

Jonathan Alper — 2009-05-19T17:11:04-04:00

Like most things in life bankruptcy involves some luck. Particularly, there is luck in the draw of your bankruptcy trustee. There is variation among Chapter 7 bankruptcy trustees in their policies concerning pursuit of non-exempt assets which can be taken from the debtor to pay unsecured creditors. Bankruptcy trustees are paid mostly by "commission"; they are paid a percentage of money recovered for creditors. They are not paid based on the time they spent trying to recover assets. The same is true for attorneys employed by bankruptcy trustees to handle legal proceedings- no recovery, no legal fee. Some trustees are more aggressive than others and will pursue relatively small assets while other trustees often ignore low-value non-exempt assets in order to spend more effort after potentially large recoveries.

Recently I attended a trustee meeting on behalf of several clients each of whom had significant non-exempt assets. In each case, I told the clients that they would have to surrender or buy back from the trustee their non-exempt assets. One Chapter 7 client listed on his schedules over $8,000 of liquid non-exempt property. A second debtor had about $4,500 non-exempt property including three non-exempt cars. A third debtor at the same session listed over $65,000 of non-exempt real estate equity and about $7,000 of non-exempt personal property. The trustee did not mention any of these clients’ non-exempt property- he did not asks the clients for copies of deeds, car titles, or other information about the property. He did not ask the debtors if they wanted to surrender or buy back their non-exempt property. The trustee can still pursue these assets, but it almost all cases a trustee pursuing non-exempt assets will raise the issue at the creditor meeting and will discuss the debtor’s alternatives at the meeting.

It seems that this Chapter 7 trustee is overlooking smaller amounts of non-exempt assets because she believes it is not practical to pursue the assets in today’s economy of depressed asset prices. These debtors were lucky. Two of them expressed relief that they finally got a break financially. All debtors should assume that they will have to surrender or buy back any and all non-exempt property in order to decide if bankruptcy is in their best interest. But maybe, you’ll get lucky.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Can Debtors File Bankruptcy in Florida While Caring For Parents in Another State?

Jonathan Alper — 2009-05-14T18:06:28-04:00

In the past month two prospective bankruptcy clients presented the same issue with similar facts. The debtors had moved to Florida in the past year and rented apartments intending to get a job and reside in Florida. Soon thereafter, the debtors each had parents living outside Florida who suffered medical problems requiring ongoing care. The debtor’s moved in with their parents outside of Florida. Because they debtor’s job search had been interrupted by their parent’s illnesses they had continued to accumulate credit card debt which they could not repay. They wanted to file bankruptcy in Florida. They asked if they should be filing in Florida even though they currently resided with their parents in different states.

The debtors should file where they permanently reside. If they currently intend Florida to be their permanent home then they file in Florida. Both debtors stated they hold Florida drivers licenses and have licences in no other state. They listed their Florida address on their 2008 federal tax return. Because they moved to Florida less than two years ago the exemptions applicable to their bankruptcies are the exemptions of the state they moved from (assuming they were in that state for two years or more). I think they file in Florida even though they current reside (on a temporary basis) in their parents’ home states.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Homestead Exemption and Entireties Exemption Are Independent Protections

Jonathan Alper — 2009-05-08T11:38:51-04:00

A joint debtor’s homestead can be exempt in bankruptcy either as homestead pursuant to the Florida Constitutional exemption or exempt as tenants by entireties pursuant to the exemption established by our state court judicial traditions. Suppose that five years prior to filing bankruptcy a couple is subject of a civil money judgment, and that they invests a large sum of cash in a Florida homestead in order to protect the money from their creditors. They take title to the homestead as tenants by entireties. During the five years they suffer additional judgments, incur more debt, and that today on of the spouses files Chapter 7 bankruptcy. The new bankruptcy law says that if debtors invest money in a homestead to avoid creditors within 10 years of filing bankruptcy the transfer is subject to reversal as a fraudulent conveyance and that the property loses its bankruptcy exemption. The issue is whether the debtors can exempt their home as entireties property. Tenants by entireties property is exempt in a Chapter 7 bankruptcy filed by one spouse to the extent there are no joint debts of the filing and the non-filing spouse.

Tenancy by entireties protection is not subject to the 10 year fraudulent transfer window under the Bankruptcy Code. There is a four year statute of limitations on fraudulent transfers under Florida statutes. (with exceptions). If the debtor’s purchase of the Florida homestead is exempt in bankruptcy as tenants by entireties property provided that the purchase cannot be reversed as a fraudulent transfer under Florida law. That a debtor's homestead exemption might be set aside under the 10 year look back of the Bankruptcy Code does not change alternative protection afforded same debtor by Florida’s entireties law. Debtors should keep in mind that homestead protection and entireties protection are independent alternatives; generally, problems with one protection does not diminish the other. See, In re: Davis, Case No. 8:08-4348.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Bankruptcy Attorney Doesn’t Return My Phone Calls

Jonathan Alper — 2009-05-07T21:55:16-04:00

I found an interesting article about bankruptcy law practice written by a Oregon bankruptcy attorney named Karen Oakes. My Bankruptcy Attorney Doesn’t Return My Phone Calls. Why? : Bankruptcy Law Network.

All attorneys , not just bankruptcy attorneys, are reminded frequently by their professional associations that that clients’ most frequent complaint about attorneys is the latter’s failure to promptly return phone calls. Ms. Oakes points out why many attorneys who practice bankruptcy cannot return all client calls as promptly as their clients would like. Her explanations do not excuse attorneys who purposefully avoid client contact or those attorneys who feel so important that they do not have to respond to their clients. Yet, she correctly points out, I think , that bankruptcy attorneys too are affected when a recession creates economic stress and an increases in bankruptcy filings.

The bankruptcy attorney’s most important task is properly performing professional legal services connected with your bankruptcy filing. Busy attorneys are usually competent attorneys, and those attorneys, like Ms. Oakes, cannot perform their professional tasks profitably and also personally answer every inquiry about the bankruptcy process. Your bankruptcy attorney should respond to any legal emergency; however, clients need to understand that their anxiety about bankruptcy is not a legal emergency. You should expect that the attorney or someone from his office will respond to your questions in about 24 hours, except if staff is on vacation or out sick. As Ms. Oakes says, if you do not receive a timely response leave a another message making sure you state (politely) that it is a second request.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

"Special Circumstance" Exception To Means Test Is Narrowly Construced By Florida Court

Jonathan Alper — 2009-05-05T20:21:28-04:00

People who earn above median income and who fail the "means test" cannot file Chapter 7 bankruptcy. There is an exception for debtors who can demonstrate "special circumstances." I have had many clients who felt their circumstances were special so that they should be able to file Chapter 7 even in they "technically" failed the means test. The term "special circumstances" is obviously vague. Everyone seriously considering bankruptcy has financial problems and circumstances which require relief, but not all financial problems can meet the test of "special circumstances." A recent Chapter 7 court decision from the Middle District of Florida found that the "special circumstance" provision is intended to provide a narrow exception, and that the debtor has a difficult burden of showing why he can file Chapter 7 despite failure to pass the objection "means test."

The court held that the legislative history was intended to protect needy debtors from the rigid and arbitrary means test formula. However, the legislature also intended that the "special circumstances" exception is reserved only for debtors whose are in "dire need" of Chapter 7 relief.. The court found that to qualify for a means test esception the debtor must establish circumstances that are "extraordinary or exceptional, are unexpected or involuntary, and place the debtor in dire need of Chapter 7 relief." In this particular case, the debtor claimed that a marital contract prohibited her from applying the property or income of the non-filing spouse to payment of the debtor’s separate debts. The court found that marital agreements are relatively common, not exceptional, voluntary agreements between spouses. The court denied the debtor’s Chapter 7 filing. The case shows that courts will reluctantly grant exceptions to means test results which deny Chapter 7 and will narrowly construe the "special circumstance" loophole. The case is: In re: Dahlia M. Stocker, Case No. 6:07-5100.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Dismissals Of Chapter 7 Bankruptcy As Abusive When Debtor Passes Means Test

Jonathan Alper — 2009-05-03T14:02:08-04:00

Many bankruptcy debtors do not understand eligibility for Chapter 7 bankruptcy. They rely too much on the means test, and they assume that if they are exempt from or pass the means test they automatically are eligible for Chapter 7. The means test is one test of Chapter 7 qualification but it is not the only applicable standard. If a debtor passes the mathematical means test analysis he avoids a presumption of abuse; the law creates a presumption that debtors who cannot pass the means test should not be filing Chapter 7 bankruptcy. However, the means test is not the only test. Debtors who pass the means test, or are exempt from the means test, may still have their Chapter 7 filing dismissed or converted to Chapter 13 if the totality of circumstances of their financial and family situation shows that their Chapter 7 is an abuse of the bankruptcy system. A Chapter 7 filing is abusive if it was filed in bad faith or if the applicable circumstances show that the debtor has the ability to repay a significant portion of his unsecured debts.

Whereas all bankruptcy debtors with primarily consumer debts must subject their filing to the means test, the abuse test only applies when the United States Trustee, or other party to a case, files a motion to dismiss the case for abuse under Code Section 707(b). The abuse test is subjective. It is very difficult to predict with certainty whether a particular debtor above median income may be challenged successfully. Another point is that the means test formula looks only at your income and expenses prior to the filing date, but the abuse test may consider increases in income and actual or possible expense reductions following the bankruptcy filing. The point is that prospective Chapter 7 debtors who have relatively high incomes or live lifestyles which could be considered "extravagant" for someone in bankruptcy should be aware that their bankruptcy could be contested even if they pass the means test.

My experience with fellow bankruptcy attorneys leads me to believe that many attorneys either do not understand or give insufficient consideration to the issue of abuse under Section 707(b)(3). I think its important that relatively high income Chapter 7 filers understand this issue. I found one bankruptcy court decision that provides a clear and thorough explanation of the applicable tests and presumptions under the means test and the abuse test relevant to Chapter 7. In re Henebury, 361 B.R. 595. I better understood the law after reading this decision.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida