The Florida Bankruptcy Law Blog

Bankruptcy's Effect On Employment And Security Clearance

Jonathan Alper — 2009-11-05T21:49:58-05:00

I often get asked about the effect of filing bankruptcy on debtors' employment. I have sometimes been asked about bankruptcy's effect on a debtor's government security clearance. I found a really good blog post on the subject by California bankruptcy attorney Michael Doan. Bankruptcy | Bankruptcy and security clearances | Bankruptcy Law Network.

Bankruptcy Debtor Seeking Conversion From 13 To 7 Prior To Job Loss: Expresses Dissatisfaction With His Bankruptcy Attorney's Response

Jonathan Alper — 2009-11-02T22:11:06-05:00

I received an email from a person who filed Chapter 13 bankruptcy and who expressed dissatisfaction with their attorney. The caller said that his company was downsizing, or going out of business, and he knew now that he would not be able to sustain her Chapter 13 plan payments. The person is current on Chapter 13 plan payments yet is sure that he will be unable to make future payments. The debtor wants to convert now to a Chapter 7 liquidation bankruptcy; by stopping the Chapter 13 payments he could conserve money for future expenses. He complained that when he called his lawyer’s office to ask about conversion he had to discuss this issue with the paralegal. He felt his questions should have been answered by the attorney and not the paralegal. The called said that, "I ...desire to ask questions of an attorney who actually seems to be interested in what is best for ...our future and my financial status."

I explained to this caller that he could not convert to a Chapter 7 because he expected future job problems. If and when his income actually dropped significantly he then could convert to Chapter 7 if his future income and expenses passed the means test. Maybe a month or two prior to his job termination he might be able to skip his Chapter 13 payment which would cause the Trustee to file a motion for dismissal. In Chapter 7 this debtor would have to account for the non-exempt cash not paid to the Chapter 13 Trustee.

The debtor told me the name of his attorney. I know the attorney to be a competent and experienced bankruptcy attorney. It is not unusual for this type of question to be handled adequately by a bankruptcy attorney’s paralegal. The issue is not a difficult legal question that requires the attorney’s research or judgment. An experienced bankruptcy paralegal knows the answer to this debtor’s question and should be able to explain the answer to their client. Just because this debtor’s attorney chose not to, or was unable to, answer the question personally does not mean the attorney is not interested in the case or the client.

If want your bankruptcy attorney to personally respond to your every question you need to make your expectations known when you hire your attorney. Understand that those attorneys who are more personally involved in their clients’ bankruptcy cases tend to charge higher fees because they commit more time to each case. If you need unrestricted access to your bankruptcy attorney make sure you find an attorney whose practice meets your expectations and be prepared to pay for the service.

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

Court Strips Second Mortgage In Chapter 7 Bankruptcy. Is It Precedent?

Jonathan Alper — 2009-10-31T13:56:57-04:00

Another bankruptcy attorney emailed me asking me for my opinion about a case where an Orlando bankruptcy judged permitted a Chapter 7 debtor to "strip" off a second mortgage on their homestead. The law as I understood it was (and is) that only Chapter 13 debtors can use bankruptcy to strip a second mortgage lien off their homestead. The second mortgage is removed when the debtor successfully completes the Chapter 13 assuming that the house value is equal to or less than the first mortgage balance.

I looked up the case the attorney referred to. Sure enough, it was a Chapter 7 bankruptcy, and the judge issued an order stripping a second mortgage from the residence. The judge did not write an opinion explaining the order. There was no objection filed by the second mortgage lender.

I don’t accept this order as precedent. I think the judge’s office made a mistake. The law is clear on this issue. A second mortgage can be stripped only in a Chapter 13 case. That there was not lender objection and no written opinion suggests that this order was entered in error.

If a debtor’s attorney submits an order with a 20 day negative notice (any party has 20 days to object or the order will be granted) , and no party objects, the judge’s office will draft an order approving the motion and present it to the judge for signature. I think in this instance the judge’s office saw an order to strip a second mortgage with a routine negative notice, did not catch the fact that it was a Chapter 7 proceeding, and drafted an order approving the motion for the judge. If the judge understood that this was a Chapter 7 case, the judge would have written an opinion explaining why the mortgage could be stripped from the homestead.

This case may be a windfall for this debtor. Debtors may get in trouble with the court if they try to "slip by" a strip motion in a Chapter 7 bankruptcy.

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

Can Chapter 13 Plan Extend Lenght Of Debtor's Car Lease?

Jonathan Alper — 2009-10-25T10:12:04-04:00

A lawyer called me with a question about a car lease in a Chapter 13 bankruptcy. His debtor filed Chapter 13 with a car lease that terminates in three years. His client’s bankruptcy plan is a five-year plan. Chapter 13 debtors cannot incur new debt (such as a new car loan or lease) without permission. The attorney and debtor are concerned that three years into the Chapter 13, at the end of the current car lease, the debtor be without a car. The attorney asked me if I knew of a way for a Chapter 13 plan to extend the term of an existing car lease.

The general rule is that Chapter 13 debtors can assume or reject leases and other contracts. This debtor will assume the car lease to keep the car for the balance of the lease term. Another general Chapter 13 rule is that debtors cannot modify the terms and conditions of existing contracts such as mortgages and leases. I don’t think this Chapter 13 debtor can extend the term of his car lease.

However, there is an easy solution. Three years into the bankruptcy plan the debtor can request permission from the Chapter 13 trustee to purchase a car when the car lease expires. The key will be to keep the debtor’s monthly payments for the next car at or below the amount of the debtor’s payments under the current lease. If the debtor does not increase his monthly car expenses the trustee will approve the purchase because the new car payment will not increase total monthly expenses and will not decrease the amount of money paid monthly to the debtor’s unsecured creditors under the bankruptcy plan. New car debt equal to or less than the current car payment does not negatively impact the debtor nor his creditors.

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

Bankruptcy Not Abusive Where Homestead Mortgage Proceeds Used For Investments

Jonathan Alper — 2009-10-25T09:25:24-04:00

I filed Chapter 7 bankruptcy for a relatively wealthy husband and wife. The debtors passed the means test primarily because they had large mortgages on their residence and a few investment properties. Secured mortgage payments provide income offsets in means test calculations. The debtors lived in a nice house, drove nice cars, and the family enjoyed an annual income over $100,000. As expected, the U.S. Trustee filed a notice of a "b(3)" challenge which means that the U.S. Trustee may consider the Chapter 7 bankruptcy to be an abuse. Bankruptcy courts will dismiss a Chapter 7 bankruptcy as an abuse where the debtor is using bankruptcy to sustain a "lavish" lifestyle at the expense of unsecured creditors. Simply stated, your bankruptcy could be in trouble when your house and your car are nicer than the judge’s and trustee’s houses and cars. In this instance, my clients got lucky.

My clients’ had two mortgages on their principal residence including a small first mortgage and a large second mortgage. The U.S. Trustee took my clients’ deposition. During the deposition he asked the clients why they incurred the large second mortgage. The clients testified that they used the proceeds of the large second mortgage to make down payments on their investment properties during the real estate bubble.

The U.S. Trustee concluded from the deposition testimony that the debtors’ debts were primarily non-consumer debts because the large second mortgage on the residence, as well as the mortgages on the debtor’s investment properties, were used for investment purposes. The general rule is that mortgages on your primary residence are consumer debts, not business debts. When a debtor uses a homestead’s second mortgage proceeds for business as opposed to consumer purposes, such as down payment on investment properties, the second mortgage is deemed to be for investment rather than consumer purposes.

A debtor whose debts (secured and unsecured) are primarily non-consumer debts is exempt from the means test in determining eligibility to file Chapter 7 bankruptcy. The U.S. Trustee explained that the non-consumer debt test also applies to the so-called "b(3)" abuse issue. Even when the U.S. Trustee believes a Chapter 7 debtor is living an extravagant lifestyle after filing Chapter 7 bankruptcy the Trustee cannot challenge the filing as an abuse when the debtor’s debts are primarily non-consumer debts.

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

Using Chapter 13 To Strip Second Mortgage After Completing A Chapter 7 Bankruptcy

Jonathan Alper — 2009-10-22T09:18:42-04:00

Debtors are discovering that they can strip off their second mortgage lien on their primary residence by filing a Chapter 13 where the value of the house is equal or less than the balance of their first mortgage. In such cases, there is no equity securing any part of the second mortgage. Debtors with upside down second mortgages often also have substantial unsecured credit card debt. They could not afford even a first mortgage unless they get relief from their credit card payments.

Some of my own clients have asked me whether they can combine a Chapter 7 bankruptcy and a Chapter 13 bankruptcy to both discharge unsecured debts and then strip their second mortgage from their primary home. The plan is to file a Chapter 7 and discharge all credit card debt. After the Chapter 7 discharge is entered, the debtor would immediately file for Chapter 13 bankruptcy. There would be not automatic stay applied in the Chapter 13 case, but the debtor would be current on his mortgage payments would not benefit from an automatic stay’s protection from foreclosure. The debtor would file a motion to strip the second mortgage in the Chapter 13 case. The debtor would end up with no unsecured debts (all discharged in the Chapter 7) and no second mortgage on his residence (stripped in Chapter 13). Can this plan work?

I don’t think this plan will work, and here’s why. The judges in the Orlando Division have written a standard order granting a motion to strip a second mortgage in Chapter 13 case. The standard order states that the debtor’s second mortgage will be released from the property when the debtor completes the Chapter 13 plan and the court enters a Chapter 13 discharge of any debts not paid in the plan. However, under the new bankruptcy law a debtor is ineligible for a discharge under Chapter 13 if he received a prior discharge in a Chapter 7 case file four years before the current Chapter 13. Therefore, the Chapter 13 filed immediately after the Chapter 7 could not earn a discharge. Since the standard mortgage strip order requires a Chapter 13 discharge, the Chapter 13 filed soon after the Chapter 7 case could not strip the debtor’s second mortgage.

Sure, the debtor could wait four years after the Chapter 7 case to try the Chapter 13 mortgage strip, but by then the debtor either will have defaulted on the unaffordable second mortgage or a market recovery will have increased the property value to the point where a mortgage strip is not allowed.

Must Judgment Creditor Dissolve Bank Account Garnishment When Debtor Files Bankruptcy?

Jonathan Alper — 2009-10-18T21:06:30-04:00

One of my bankruptcy clients had approximately $700 in a checking account just prior to filing Chapter 7 bankruptcy. Before we filed the bankruptcy petition one of the judgment creditors listed on A bankruptcy called my office to complain that one of the debtor’s judgment creditors garnished the checking account. The debtor called the creditor and asked them to release the writ of garnishment. They refused. Then, the debtor called our office complaining that the creditor was violating the automatic stay by refusing to release the garnishment on the checking account. Is the creditor violating the bankruptcy stay by maintaining a garnishment after the account owner files bankruptcy? I think not.

The writ of garnishment creates a judicial lien on the debtors bank account when the garnishment is served on the bank. Courts have found that the debtor has no affirmative duty to dissolve the bank account garnishment. Further actions in state court to get the money after the bankruptcy filing would probably constitute a stay violation. If the debtor claims an exemption of the bank account funds because, for example, the money represents wages of a head of household debtor, the judgment creditor would have to release the money to the debtor unless the exemption is timely and successfully challenged in bankruptcy court. If the money is non-exempt, then the money becomes part of the bankruptcy estate to be distributed equally among all unsecured creditors. If the judgment creditor had already received the money prior to the bankruptcy by virtue of the garnishment the bankruptcy trustee could claim the money back from the judgment creditor because the garnishment would have produced an unallowable preference. A bankruptcy trustee can void the judicial lien of the garnishment if necessary to recover the preferential payment to this creditor.

The judgment creditor’s duty would be different if this were a wage garnishment. Wage garnishments apply to future wages which are owed to the debtor for his employment after the debtor filed bankruptcy. The debtor’s future wages are not part of the bankruptcy estate and are not available to pre-filing creditors. Courts have held that judgment creditor have an affirmative duty to dissolve a wage garnishment against a bankruptcy as soon as the bankruptcy is filed.

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

Debtor's Rarely Use Bankruptcy To Steal Money From Creditors

Jonathan Alper — 2009-10-13T15:26:31-04:00

Most people who file bankruptcy are good people who do not abuse the bankruptcy system. In fact, almost all of my bankruptcy clients feel bad about wiping out debts they believe they are morally obligated to pay. Then, once in a while, I encounter the sleazy debtor who tries to use Chapter 7 bankruptcy to steal as much money he can from his creditors.

I received a phone call last week from a prospective bankruptcy debtor who asked me about the following pre-bankruptcy planning scenario. One of his good friends was planning do a home repair with a cost of about $25,000. The friend agreed to pay this caller $25,000 in cash which the caller would then hide under the mattress. The caller would pay for his friend’s home repair on his personal credit cards. He would make minimum payments for a few months. Then he would file Chapter 7 bankruptcy and discharge the debt for his friend’s $25,000 repair bill as well as all his previous credit card debt. He wasn’t asking me to take him as a client, but he wanted to consult with me to see if his plan would work.

This is bank robbery under the disguise of bankruptcy. I suspect these types of scams usually slip through the bankruptcy system. This guy will probably get away with it because he’ll not disclose the arrangement to his bankruptcy attorney. It bothers me because, as I said above, the overwhelming majority of bankruptcy debtors are honest people who lost income and are without adequate savings, or are people who bought things they could not afford in order to live above their means. In either case, most bankruptcy debtors do not intentionally borrow money with no intent of trying to pay back the money.

Chapter 7 Bankruptcy Made More Difficult By The Newest Lower Median Income Numbers

Jonathan Alper — 2009-10-11T21:51:49-04:00

The census bureau’s median income figures are changing effective for bankruptcy petitions filed after November 1, 2009. Median income is used to determine if prospective bankruptcy debtors pass the means test. Florida’s median income has been increasing since the new bankruptcy law went into effect in October, 2005. People whose family income is below the median income for their family size can file for Chapter 7 bankruptcy automatically without having to pass the "means test." As the median income increased it became easier for people to qualify for Chapter 7.

The latest revised median income levels are lower probably because more people have lost jobs or have reduced income during the recession. For example the median income for a single person household in Florida is reduced from $42, 468 to $41,226. For a family of four, the median family income is lowered from $71,124 to $69,009. The recession is making it somewhat more difficult to file bankruptcy. For those debtors above median income, the lower census figures make it a little harder to pass the means test.

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

Second Mortgage Sabotage Of First Mortgage Modification Plan

Jonathan Alper — 2009-10-08T20:51:09-04:00

I would like to ask you, the blog readers, to help a reporter who is investigating practices in the mortgage modification programs. A national business publication is investigating overly aggressive second mortgage lenders. The reporter, Mr. Robert Berner (312-451-7149), is looking at situations where a second mortgage lender sues a homeowner after the homeowner has already entered into a modification agreement with the first mortgage. The second mortgage gets a judgment against the homeowner and then garnishes the owner's bank accounts or salary which causes the homeowner to default under the first mortgage modification agreement. These second mortgage lenders are sabotaging the modification programs set up and encouraged by the government to help homeowners. In some cases where the same bank holds the first and second mortgage the bank modifies the first mortgage and then sells the second mortgage to a third party investor which then agressively collects the second or even sues the homeowner for delinquent second mortgage payments. These mortgage lenders appear cooperative in modifying their first mortgages but then undermine the same modification by collecting or selling the second mortgage.

A related mortgage issue I have heard about from my own clients occurs when a homeowner has checking accounts at the same bank that holds his home mortgage. Some clients have reported that when they missed a mortgage payment the bank invaded their checking account and pulled the mortgage payment out of their checking account without notice. I have previously posted my general advice which is to move your accounts out of the bank that holds your home mortgage if you miss a mortgage payment.

Please get involved. If you have had a mortgage modification plan ruined by a second mortgage holder who sued you during the modification process, or if you have had your mortgage lender grab mortgage payments from your checking account at the same back before a foreclosure or other lawsuit was even filed, call Mr. Berner (312-451-7149) and discuss your experiences.

Clients' Chapter 7 Bankruptcy Dismissed For "Abuse" and Extravagant Lifestyle

Jonathan Alper — 2009-10-06T11:17:52-04:00

People who pass the means test, or are exempt from the means test, may still have their Chapter 7 bankruptcy dismissed if their filing is deemed "abusive." The United States Trustee (different from the Chapter 7 trustee) may file motions to dismiss a bankruptcy if the U.S. Trustee believes the bankruptcy abuses the bankruptcy law. The bankruptcy court evaluates U.S. Trustee abuse challenges under the totality of circumstances involved in the bankruptcy filing. In layman’s terms, if the court finds that the debtor can afford to pay a substantial portion of his debt and is abusing the system to wipe out these debts the court can dismiss the Chapter 7 bankruptcy.

Last week one of my own clients had their case dismissed because the judge found their joint filing to be an abuse of Chapter 7 bankruptcy. The judge wrote a 32 page opinion. The decision is a thorough explanation and detailed application of the abuse standard and should help future bankruptcy debtors understand what a Trustee and bankruptcy judge will find to be an abuse of Chapter 7 bankruptcy.

Abuse is determined on a case by case analysis. Here are some of the factors this judge found persuasive in dismissing my clients’ joint Chapter 7 filing:

1. The debtors’ family income is over $200,000 per year;

2. The debtors’ timed their filing just before an a significant raise which tripled their monthly income.

3. The debtors were living in a very expensive house with no equity.

4. The debtors acquired a luxury car pre-petition with a $933 monthly lease payment.

5. They are attempting to maintain a second $26,000 car which has a $65,000 car loan.

6. The debtors are subsidizing living expenses of relatives.

7. The debtors continue to spend a significant portion of income on investments, restaurants, and non-essential retail purchase.

8. And the debtors’ testimony was not credible.

The court stated that the debtors’ bankruptcy was caused by an extravagant lifestyle which they are attempting to maintain after filing to the detriment of their creditors. The case is 6:09-bk-00914-ABB, Middle District, Orlando Division.

I have explained to many clients that rich people do not do well in bankruptcy court. Trustees and judges are not sympathetic to those debtors whose lifestyle is better and more indulgent than the judge’s and Trustee’s own standards of living. The new bankruptcy law was intended to stop people from sustaining luxury at the expense of banks and other creditors. This case illustrates what bankruptcy courts can and will do to prevent well-off debtors from wiping out all their debts.

Many people with high incomes also have very high and unpayable debts in today’s recession. Well-intentioned high income debtors can find themselves insolvent and unable to service their debts. Bankruptcy is not a good solution for such debtors. The high income or high net worth debtor can use Florida’s homestead laws and other statutory exemptions to protect assets with equity and then negotiate a low settlement with their most aggressive creditors.

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

Orlando Bankruptcy Courts To Take Tougher Stand On Automobile Valuation

Jonathan Alper — 2009-09-29T20:08:04-04:00

I have heard from several sources that Orlando Division bankruptcy courts are getting tough on car valuation in Chapter 7 bankruptcy. I have written previous blog posts about bankruptcy clients who successfully used valuation sheets from CarMax as evidence of their non-exempt car’s valuation prior to filing. Bankruptcy debtors found that the CarMax appraisals were lower than NADA or Blue Book valuations during the economic crises and gas crises when car valuations dropped precipitously. During the past year most Chapter 7 trustees accepted CarMax appraisals because on the theory that CarMax appraisals constituted purchase offers and were true indicators of what an arms-length buyer is willing to pay in the current market. Also, trustees found they could not get NADA values when they auctioned a debtor’s vehicle and that the CarMax valuations were a reasonable statement of market value. The policy is changing and become stricter.

The Orlando Division bankruptcy judges recently reaffirmed that the value of debtor’s automobiles for purposes of the vehicle exemption or buy-back from the trustee is the average of the trade in value and the retail sales values. The judges believe that CarMax and other similar national automobile companies have been quoting trade in values not fair market values or purchase offers. The judges asserted that trustees are supposed to arrive at market value of automobiles by averaging trade in value and full retail value. This stricter approach to car valuation will effectively reduce Chapter 7 debtors ability to exempt cars in bankruptcy and increase the debtor’s costs of buying back non-exempt car equity from the bankruptcy trustee. Chapter 7 bankruptcy will be more difficult for many debtors in the Orlando Division.

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

Are You Entitled To A Refund Of Your Legal Fees Paid If You Change Your Mind About Filing Bankruptcy?

Jonathan Alper — 2009-09-28T20:15:08-04:00

Sometimes people hire an attorney to file bankruptcy and then change their mind about filing. In some cases, the debtor works things out with his creditors; some prospective debtors receive family assistance to pay their bills, and other debtors just feel bad about filing bankruptcy. In many such cases, the client in financial difficulty expects their bankruptcy attorney to refund fees paid previously to start the bankruptcy process. I saw an interesting blog post on this question by California bankruptcy attorney, Michael Doan, of San Diego California. Michael said that California law makes it difficult to recover fees already paid to a bankruptcy attorney if you change your mind about filing.. I did some research about fee recovery from Florida attorneys.

Whether your bankruptcy attorney is supposed to refund fees if you change your mind about filing depends on the terms of the written fee agreement between you and your Florida lawyer. If your initial payment to your attorney is payable to your attorney’s trust account to cover future fees to the extent earned then you are probably entitled to a refund if your attorney has not done any work on your case. However, if your initial payment to your bankruptcy lawyer is a "retainer" then your payment is not refundable even if they attorney has done no work to prepare your bankruptcy petition. The Florida Bar rules of professional conduct state, in part, that "Retainers are funds paid to guarantee the future availability of the lawyer's legal services and are earned by the lawyer upon receipt. Retainers, being funds of the lawyer, may not be placed in the client's trust account." Because the Bar considers "retainers" earned when paid they are not subject to refund.

Also, if your fee agreement does not characterize the initial payment as a "retainer" but expressly states otherwise that all fees paid to the lawyer are "earned" when received, the fees are not held in trust and probably are not refundable.

If you are hiring attorney to file bankruptcy but think you could change your mind before filing ask your attorney what happens to fees paid if you don’t go through with bankruptcy. Ask your bankruptcy lawyer if any part of fees advanced for bankruptcy will be held in the lawyer’s trust account where they might be refundable if you do not file. Know that if your attorney asks you for "a retainer" then you are not entitled to that money if you change your mind about bankruptcy. Notwithstanding the Florida Bar guidelines I find that many attorneys will refund part of "retainers" or "fees earned" if they perform little or no work in preparation of a bankruptcy petition. Fair treatment of clients is always good business which pays off for the attorney over time.

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

Is Debtor Or Trustee Entitled To Rental Income From Properties Not Included In Bankrutcy Estate?

Jonathan Alper — 2009-09-25T11:20:05-04:00

Because of the depressed real estate market most bankruptcy debtors who own investment rental property have no interest in retaining the property after filing Chapter 7 bankruptcy. The Chapter 7 trustees are rarely interested in administering rental properties as part of the bankruptcy estate because few properties have equity today especially after the trustee considers the costs of marketing, maintenance, and sale. Those properties which are occupied after the bankruptcy filing continue to generate monthly rent. At a recent trustee/creditors meeting I discussed with the Chapter 7 trustee whether the debtor or the trustee is entitled to collect rental income generated from properties which the trustee is not claiming as part of the bankruptcy estate and which the debtor wants to surrender.

The trustee stated that he had been claiming and collecting rents from debtors’ properties. The trustee stated that he usually abandons quickly rental property by filing a notice of abandonment because he does not want personal liability associated with ownership of rental properties. He said that his claim to rent is based upon his right to assets received by the debtor within six months of filing such as inheritances and insurance proceeds. The trustee stated that as a practical matter most tenants stop paying rent when the owner files bankruptcy and the only type of rent he has been able to collect with regularity is rent paid by the government for Section 8 housing.

It seems illogical that a trustee can collect income from an asset which has no equity and is not part of the bankruptcy estate. However, bankruptcy law gives trustees the right to income from all assets owned by the debtor. The trustee has a limited amount of time following the creditor meeting with the debtor to abandon the debtor’s assets, and as stated above, most trustees quickly will abandon rental properties in today’s market. I agree with the Chapter 7 trustee is entitled to rental income received after the debtor files bankruptcy and before the trustee abandons rental property with no equity. After abandonment the property and the right to receive rent reverts back to the debtor. A debtor could keep such properties if they can bring current the mortgage.

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

Does Bankruptcy Automatic Stay Apply to Creditors Located In Other Countries?

Jonathan Alper — 2009-09-24T16:54:28-04:00

The automatic stay imposed by the filing of a bankruptcy stops all creditors from taking any action to collect a debt from the Debtor or to interfere with property of the bankruptcy estate. I represent a Debtor who owes money on a credit card issued by a bank in Mexico. The Debtor listed the Mexican bank on the Petition. The bank’s collection department continues to send the Debtor faxes and letters trying to collect the same credit card debt. My office called the debt collector and asked him to stop collections. We wrote a letter to the bank’s legal department advising them that their daily faxes to the Debtor violated the automatic stay. The bank refuses to stop collection on the basis that they are located in the U.S. The bank maintains that the automatic stay does not apply to creditors located outside the United States.

My initial research suggests that the bank is not correct. The cases I have found on this issue state that the automatic stay has worldwide effect whether or not this is consistent with domestic law in the relevant foreign country, and that if a creditor violates the stay anywhere in the world, that creditor is subject to sanctions in the United States. The United States courts general recognize orders from bankruptcy courts in other countries and our courts expect, and demand, reciprocal comity. My client is filing a motion for sanctions against the Mexican bank for its multiple stay violations. If I am correct the bankruptcy court will rule that the bank must abide by the stay and sanction them appropriately.

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