Chapter 13 – Page 8 – Rochester Bankruptcy and Debt Relief

Automatic Stay and Proceedings in New York Family Court

I have previously written about automatic stay in Chapter 7 Bankruptcy and Chapter 13 Bankruptcy, and divorce, and domestic support obligations. While divorce is handled in the New York State Supreme Court, once in a while, a family court petition seeking child support or spousal support is filed against one of my bankruptcy clients in New York State Family Court. When this happens, usually I am asked whether the automatic stay prevent the filing or continuation of the family court proceedings. My answer to that question will depend on the type of bankruptcy filed.

While the debtors tend to believe that the automatic stay prevents creditors from proceeding with collection activities, it does not stop most family court matters. The Automatic Stay, in Chapter 7 Bankruptcy, which is governed by §362(a) of the Bankruptcy Code, will terminate any collection activities. However, one of the exemption included in §362(b) allows for actions in Family Court matters and also in Supreme Court involving domestic support obligations.

Specifically, Bankruptcy Code §362(b)(2)(A)(ii) provides:

The Automatic Stay created by a bankruptcy filing bars the commencement or continuation of most legal proceedings, but it has no effect on a proceeding for –

the establishment of paternity,

the establishment or modification of an order for a Domestic Support Obligation such as child support,

the determination of child custody or visitation issues, or

the dissolution of marriage, except to the extent that such proceeding may seek to determine a division of marital property in which the bankruptcy estate also has an interest.

While the divorce can be granted in Supreme Court without first obtaining relief from the Automatic Stay, the marital property cannot be divided without obtaining such relief. The Automatic Stay also does not prevent the post-petition collection of Domestic Support Obligations such as alimony or child support.

from any property belonging to the debtor, providing that the bankruptcy estate does not also have an interest in said property,

from automatic wage deduction orders created by a statute or judicial or administrative order,

from the interception of debtor’s federal or state income tax refunds, or

from the withholding, suspension or restriction of a debtor’s driver’s license or professional or occupational license.

Thus, there is no protection in bankruptcy court from the obligations imposed by a Domestic Support Obligation which can be brought in either the Family Court or Supreme Court. The above is true with respect to Chapter 7 Bankruptcy, however, in Chapter 13 Bankruptcy the answer is not the same.

The reason for this is the way Chapter 13 Bankruptcy treats debtor’s earnings after the filing of the bankruptcy petition. The property of the Chapter 13 Bankruptcy estate, which is broadly defined, specifically includes “earnings”. See 11 U.S.C. §541 [a] [6]; §1306 [a]. Because payments to creditors must come from the debtor’s post-petition earnings, those earning are property of the Chapter 13 estate pursuant to 11 U.S.C. §1306 [a] [2]. Thus, the claimant seeking to collect arrearages in support obligations is not free to pursue the Chapter 13 debtor’s post-petition earnings in Family Court.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Filing for Chapter 7 Bankruptcy and Keeping Your Bank Accounts

One of the most common questions I hear from clients is whether they are able to keep their bank accounts while they are in bankruptcy, or to open new accounts after bankruptcy. My usual answer to that question is that there is nothing under bankruptcy code that would prevent a debtor from having or keeping bank accounts. While there is nothing under the bankruptcy law that prohibits it, there are may be some practical complications.

As I have discussed previously, a typical bankruptcy requires planning and preparation. One of the possible situations I prepare my clients for is a possibility that their bank may close their bank accounts or withdraw money from their accounts. If the debtor has a bank account with a bank or credit union that has also loaned him or her money, that bank has the right of set-off. That is the bank has the right to set-off the money in the debtor’s account against any debt owed to the bank. This is true even if the debt was not delinquent and the funds would be protected by the debtor’s cash exemption. Under a typical lending agreement, a bank or a credit union is usually cross-collateralized. That means that any assets you have securing the loan, including any accounts you may have at that institution, secure all of debtor’s debts with that bank or credit union. If the debtor files for bankruptcy, the bank may take any funds and apply them to any outstanding loan. Even if the debtor is planning to continue to pay on the loan, and sign a reaffirmation agreement, the funds may be frozen or suddenly become unavailable. It is usually my advice to open a back-up account elsewhere, at an institution where the debtor didn’t borrow any money.

If the debtor has accounts which might be subject to set off, there is no need to close such accounts. If there is a small amount of money left in the account, those issue can be resolved after the bankruptcy filing. With respect to opening bank accounts after bankruptcy, the debtor may run into some problems with the Chex Systems which is utilized by most banks. Chex Systems operates similarly to credit bureaus and receives reports from its member institutions.

Eviction, Chapter 7 Bankruptcy and Chapter 13 Bankruptcy

I often receive phone calls from people in Rochester and elsewhere in Western New York who are facing a potential eviction involving a commercial or residential lease. Usually the debtors do not know what their bankruptcy options are and are seeking advice how to proceed.

A bankruptcy filing by the tenant, either residential or commercial, immediately stops any pending eviction proceedings as a result of an “automatic stay.” Automatic stay, as I have written previously, is a mandatory injunction that arises by operation of law without the need for a hearing or order of the Bankruptcy Court. The automatic stay stops all of creditor’s efforts to pursue collections, litigation or judgment enforcement. The automatic stay protect the debtor and the property of the debtor’s bankruptcy estate. However, with respect to leases, it is critical to know at what stage the eviction proceedings are.

In the case of a lease, whether commercial or residential, the critical issue is whether a writ of eviction has already been issued from the landlord-tenant court. There is a significant body of case law holding that once a writ of eviction has issued from the landlord-tenant court the interest of the tenant in the lease has terminated. As result, if the lease is considered to be terminated by the bankruptcy court, the tenant can be evicted and the automatic stay will not stop the eviction. Thus, if a bankruptcy is being considered to prevent to postpone the eviction, it is critical for the debtor to contact a bankruptcy lawyer as soon as the eviction petition is served.

For a tenant who files for bankruptcy, the available options depend upon what chapter (type) of bankruptcy the debtor may be filing.

If the debtor is filing Chapter 7 bankruptcy, it may provide a delay in being evicted, and discharge the tenant from any liability under the lease. At the same time, the filing will not allow the debtor to either cure the default or give extra time to make payments under the lease.

For an individual debtor who has a lease, and has not kept up with the payments, Chapter 13 bankruptcy can provide the opportunity to cure the arrears (past due rent) over time. In a Chapter 13 bankruptcy, the arrears can be paid over a 5 year period, depending on the terms of the plan. If the tenant doesn’t stay current with post-bankruptcy rent, the landlord can seek “relief from the automatic stay” from the Bankruptcy Court to permit the landlord to move forward to evict the tenant in state court.

Should You Use Credit Cards Once You Decided to File Chapter 7 or Chapter 13 Bankruptcy

If you are contemplating filing Chapter 7 or Chapter 13 bankruptcy, you should stop using your credit cards. Once you’ve decided to file for bankruptcy, any credit card use after that point will be highly scrutinized by both the credit card issuer and the bankruptcy trustee, and is likely to be viewed with a great deal of suspicion. The reasons for this are obvious. If the debtor decides that he is seeking to eliminate his credit card debt through Chapter 7 bankruptcy, or pay a lesser amount though a Chapter 13 filing, then incurring additional credit card debt can be considered fraudulent. Specifically, the credit card issuer will make an argument that the additional debt was incurred without intention to repay, then the discharge can be objected to. Also, the issuer will also look at all of the transactions to verify that the money was not spent on such things as vacation trips, or that other unnecessary spending didn’t take place. If a credit card issuer learns that a debtor used a card without any intention of making full payment, then the credit card company has the right to object to the debtor’s discharge of that particular debt.

Also, if the bankruptcy trustee, or United States Trustee, learn that the debtor intentionally ran up his credit cards before filing, then either trustee can seek to have the debtor’s discharge denied or move to have the case dismissed. There is also the possibility that the debtor can be found to have engaged in bankruptcy fraud, which is a criminal offense.

While consumer Chapter 7 bankruptcy allows the debtor to eliminate all credit card debts and get a fresh new financial start, the debtor should not jeopardize his ability to seek bankruptcy protection by engaging in self-serving or foolish behavior. There is simply no reason to create problems for the upcoming bankruptcy filing. Therefore, don’t use your credit cards once you’ve decided to file bankruptcy.

If you are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a New York bankruptcy lawyer.

Mistakes to Avoid When Filing For Chapter 7 or Chapter 13 Bankruptcy in New York

While bankruptcy appears to be a straight forward process, there are many pitfalls for the unwary. Some actions taken by the debtor before filing Chapter 7 or Chapter 13 bankruptcy in New York, may result in serious consequences. Here are some areas where mistakes are commonly made

1. Debts owed to family and friends. I would strongly recommend that you don’t try to pay back the debts owed to family and friends in anticipation of your bankruptcy filing. A trustee in a bankruptcy case can reach back and undo any such transactions that took place within one year prior to your bankruptcy filing. The concept is known as preference. It is intended to prevent debtors from favoring some creditors over other creditors by transferring assets to a third party and then claiming they have nothing left. While you may not be aware of preference, and your actions are responsible and just, they are likely to be undone by the bankruptcy trustee.

2. Disclose your financial affairs to your bankruptcy lawyer. Always be honest with your lawyer about your assets and your financial transactions. I am on your side and am able to help you, but I need to know everything that has taken place in order to take full benefit of the bankruptcy law. I can’t do that unless I have all the information available. Also, if I am not aware of certain facts, and if they come to light during the case or even after your discharge that you’ve withheld information or hid assets, you’ll not only lose the assets that were hidden, but the entire discharge can be undone. This means all of the bankruptcy protection created by your bankruptcy is lost and creditors can once again pursue you.

3. Don’t withdraw your retirement money. Sometimes, this is the easy route out of financial difficulties since the debtor may think that he or she may need more cash on hand if you’re getting ready to file for bankruptcy. However, since retirement plans such as IRAs and your 401(k) are actually protected from creditors by bankruptcy exemptions in New York. If you take the cash out and try to keep it, it will become part of the debtor’s estate. Additionally, you’ll owe pay taxes on the money you withdraw.

4. Don’t disregard pending lawsuits against you. While the automatic stay will protect you from any pending actions, once the bankruptcy is filed, any lawsuits pending prior to the filing should not be allowed to go into default. Lawsuits, if permitted to go into default have consequences and may result in adverse finding that may be difficult to undo during the bankruptcy. Do not treat law suits the same way as creditors. While the creditors will primarily call you and send you letters, lawsuits can have serious consequences that can be implemented before you file. Therefore, make sure that you, or your attorney, respond to any pending actions.

Of course, the most important step in all of this is to make sure you’re working with a knowledgeable, experienced and trustworthy bankruptcy lawyer. A good bankruptcy lawyer will help you successfully navigate the bankruptcy process and help ensure that you avoid all of the potential problems.

Reviewing Your Chapter 7 and Chapter 13 Bankruptcy Petition – A Critical Part of Your Bankruptcy Process

I spend a fair amount of time in 341 hearings. While waiting for my bankruptcy cases to be called, I listen to the trustee asking debtors and their lawyers questions about bankruptcy petitions. In my experience, one thing that always that gets bankruptcy trustee worked up, are incomplete or inaccurate bankruptcy petitions. Because the bankruptcy petition is signed by the debtors who, by signing it, certify its accuracy, debtors’ failure to read their bankruptcy petitions and lack of awareness of factual errors or omissions that they contain may cause significant problems.

While a completed bankruptcy petition usually runs between 30 and 40 pages, it is not an exciting read, and contains plenty of legalese, as well as recitals of the debtors’ financial assets, income, expenses,a a list of all the creditors. However, by signing it, the debtor certifies that he/she not only read it, but that all information contained in the petition is true and correct, just as if the debtor testified to that information under oath. At the beginning of every 341 hearing, the trustee asking the debtor if he/she read the bankruptcy petition before having signed it, reviewed it with his/her bankruptcy attorney, and if everything in the petition is true and correct.

Trustees get very upset at debtors because their petitions weren’t accurate or complete. A typical debtor would tell the trustee, “I didn’t notice a mistake or omission and it needs to be corrected,” but later admit they did not read the petition carefully. When the bankruptcy petition is missing important information and that information could have been easily corrected by the debtor, the debtor’s credibility is greatly reduced. If the petition is completely inaccurate, the trustee can allege that the debtor was engaging in fraudulent and deceptive conduct.

In my practice, I insist that my clients read every page of their petition and review it with me before they sign it. Even if the client want to rely on my work, the petition has to be read by every client who must understand its contents.

Small Business and Chapter 7 Bankruptcy

In the last few months, I have received a number of calls from owners of small businesses who want to file Chapter 7 bankruptcy, primarily due to credit card debt, but want to continue to operate their businesses. In most of these cases, the business owner have used personal credit cards to fund business operations. Since the time the credit cards were used, the business improved, and is now profitable or would be profitable where it not for the payments on credit card debt.

Unfortunately, in this type of situation, filing bankruptcy comes with a price. If you own a small business and are incorporated, the shares of that business are assets of the bankruptcy estate. Further, any accounts receivable of the business are an asset of the business that belong to the shareholder. Thus, if the shareholder files Chapter 7 bankruptcy, the bankruptcy trustee will treat the shares in the business, value them, and will try to sell them

Except in the case of a personal service business that has no significant inventory, receivables or any valuable assets, other than the experience and labor of its owner, the bankruptcy trustee will demand that the owner cease operating the business, and produce its records, value its assets and disclose other information related to the business to the trustee. As a result, a Chapter 7 bankruptcy filing is likely to result in the business being shut down, and its owner being forced to start over. Once the bankruptcy is completed, a new corporate entity can be formed and, assuming that the owner is able to resume operations and the business can be profitable, operations can be restarted.

Besides Chapter 7 bankruptcy, there are other options. Under appropriate circumstances, an owner of a small business can file a Chapter 13 bankruptcy assuming that the business is being operated as a sole proprietorship, and, if the business is large enough, Chapter 11 bankruptcy may be an option. In a Chapter 13 filing, it is usually difficult to predict what the cash flow of the business will be like and, therefore, it is difficult to come up with a bankruptcy payment plan.

Can Trustee Search Your Residence in Chapter 7 or Chapter 13 Bankruptcy?

A question that I commonly hear from debtors in Chapter 7 and Chapter 13 bankruptcies in Rochester or surrounding counties, is whether when they file for bankruptcy, someone will come to their house or apartment, and search or remove their assets. My typical response is to reassure them by telling them that in my experience, any such visits are extremely rare, and would only serve to verify the accuracy of their bankruptcy petition and other disclosure provided during their bankruptcy case. At the same time, as a bankruptcy lawyer, any such statements makes me concerned, since whether or not someone will actually come to search your house or apartment if you file for Chapter 7 or Chapter 13 bankruptcy, the petition, schedules and statement of financial affairs must to be completed truthfully and accurately. Any attempt by the debtor to conceal assets, or any dishonest statements in the bankruptcy petition or other information provided during the bankruptcy, if caught, are likely to result in a referral to the U.S. Attorney Office for criminal prosecution. There are currently individuals serving time in federal penitentiary who have been convicted of bankruptcy crimes, including those whose bankruptcy crimes cases were prosecuted in Rochester. In addition, the financial consequences of the dismissal of the bankruptcy case, and denial of discharge, can be significant, even if there is no criminal prosecution.

With respect to obtaining access to the debtor’s house or apartment, the bankruptcy trustee has the ability to obtain an order authorizing him or her to search the debtor’s house or apartment, with the assistance of the United States Marshall, and to break doors, locks and safes during the course of an investigation. Usually such order will be obtained on an ex parte basis — meaning without prior notice to the debtor to prevent him or her from hiding the assets.

As I have written before, when you file Chapter 7 bankruptcy, you receive the benefit of bankruptcy exemptions. For most debtors, the exemptions allow them to keep most, if not all, of the property they own. While each case is fact specific, and depends of the property owned and its value, a bankruptcy lawyer will be able to engage in pre-bankruptcy exemption planning to maximize available exemptions, and to minimize the assets that would have to be turned over to the trustee if their value exceeds permissible exemptions.

Therefore, the bankruptcy petition, and all of the schedules and other documents provided to the bankruptcy court, should be prepared truthfully and completely, while understanding that the trustee in your bankruptcy case has the ability to get a court order authorizing him to verify the accuracy of your petition. If the debtor provided truthful and accurate disclosure, he or she has nothing to fear. As a bankruptcy attorney, I work closely with all of my clients to make sure that they understand their obligations as debtors, but also to make sure they get to keep as much property as they are legally allowed.

“Pond” Motion and Avoiding Second Mortgage Lien in Chapter 13 Bankruptcy

In Chapter 13 bankruptcies, it is not uncommon to see situations where the debtor, who owns a home, has both a first and a second mortgage, or even a third mortgage on that home. In today’s real estate market, it is not uncommon for those mortgages to exceed the value of the home by a significant amount. Since the secured debt must be paid in full in Chapter 13 bankruptcy, does it make sense for the debtor to greatly overpay the value of that home? The bankruptcy law offers us a solution for those situations. Debtor’s bankrutcy lawyer can bring a “Pond” motion. The motion is named after a decision, In re Pond, 252 F.3d 122 (2nd Cir. 2001).

A Pond motion is a motion made in a chapter 13 Bankruptcy case where the debtor owns and lives (as his or her primary residence) in a residence which has a second mortgage and the value of the house is less than the amount owed on the first mortgage, as of the date the debtor files his or her Chapter 13 bankruptcy petition. If the motion is successful, the second mortgage will be treated as unsecured debt, removing its secured status. As a result, the amount owed to the second mortgage company gets treated like any other unsecured debt, and paid, in most Chapter 13 bankruptcies, pro rata. If the debtor is paying 50% of his unsecured debt through the Chapter 13 plan, it means that the amount paid on the second mortgage will be 50% of the amount owed. Once the debtor obtains his or her discharge the remainder of the second mortgage debt is no longer owed.

Here in Rochester, Judge Ninfo has written a number of decisions addressing Pond motions. One critical issue associated with Pond motions is valuation of the real estate. In In re Dzenziel, the central issue presented to the court was whether the valuation of the property would make the second mortgage unsecured.

The debtors brought their Pond motion, alleging that their residence had a value of $99,047, and the balance due on the first mortgage was $99,813.97 as of their most recent mortgage statement. Since the balance due on the first mortgage exceeded the value of the residence, the debtors asserted that the second mortgage was totally unsecured on the date they filed their Chapter 13 petition. Because the second mortgagor disputed the debtor’s valuation of the property, the court conducted a trial on the Pond motion.

Testimony at trial indicated that the debtors originally purchased the property for $101,000 when the property had been appraised at $111,000. The debtors reported that when they obtained the second mortgage in 1999, the property had been appraised at $180,000. The competing real estate appraisers testified respectively that the value of the property was either between $97,808 and $100,285 (adjusted to $99,047), or $120,000.

Analyzing the Pond decision, Judge Ninfo wrote, “If there is no equity in a debtor’s residence after accounting for other encumbrances that have priority over a mortgage lien, so that the mortgage lien is not even partially secured, the lien can be avoided and the mortgage debt treated as unsecured.” The court further stated that the burden falls upon the debtor to demonstrate that there is not even $1 of value over prior valid liens to support the mortgage lien that is to be avoided. The court also held that the debtor’s burden of proof is higher when “it appears that there was equity available for the mortgage … at the time it was executed; the alleged value deficiency may have been created in part because of a debtor’s failure to make payments on superior mortgages… and [if] the alleged value deficiency is not substantial….”
Reviewing the evidence presented, the court determined that the property has a value of at least $100,000, which does exceed the balance due on the first mortgage, and based upon relevant testimony, the property probably has a value between $120,000 to $145,000. Judge Ninfo concluded that the debtors have not met their burden to demonstrate that there is no value over prior liens that would enable the court to avoid the second mortgage and denied the motion.

The above demonstrates that valuation of property is critical in those situations where the debtor has an opportunity to convert second mortgage to unsecured debt. The bankruptcy lawyer would do well to use a reputable real estate appraiser and be prepared to conduct a hearing to substantiate the property’s value.

Social Security Retirement, Social Security Disability and Chapter 7 and Chapter 13 Bankruptcy

If you are in debt, does it always make sense to file either Chapter 7 or Chapter 13 bankruptcy? If your only source of income is Social Security or Social Security Disability, you can file for bankruptcy, but it may not be necessary. Because of the exemptions under both federal and New York State law, if your sole source of income is either Social Security Retirement or Social Security Disability, you are generally considered to be judgment proof and your income is exempt from garnishment or other collections actions by the creditors. While your creditors still have the right to sue you and obtain judgments, they are not likely to be able to enforce them against your income or any bank accounts that contain solely the money from either Social Security Disability or Social Security Retirement. At the same time, the debtor may still have other assets, either personal or real property, that a creditor may reach once it obtains a judgment.

Even if you are judgment proof, you may still need to file a Chapter 7 or Chapter 13 bankruptcy. If you have secured debt, such as a mortgage or car payment, and you are behind on your payments, Chapter 13 may give you the ability to bring these secured debts current, while still discharging most or all of your revolving credit debt, personal loans or medical debt. Another benefit of filing for bankruptcy is that either Chapter 7 or Chapter 13 bankruptcy will stop harassment by the creditors.