bankruptcy – Page 2 – Rochester Bankruptcy and Debt Relief

Bankruptcy Fraud and Revocation of Discharge

Once the discharge is granted, can it be revoked? This question was addressed by the court had to address in In Re Galan, (W.D.N.Y. 2014).

Section 727(d)(2) provides that a bankruptcy judge should revoke the discharge if, the debtor acquired property that is property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee.

In Galan, the debtor had failed to report his interest in real property and also had failed to disclose that he was in receipt of insurance proceeds related to the property. Once debtor’s failure to disclose these facts to the bankruptcy court was discovered, both the bankruptcy and the U.S. Trustee moved to revoke his discharge.

The court held that revocation of a debtor’s discharge is permitted pursuant to 11 U.S.C. § 727(d)(2), where a debtor “acquired property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee.” The provision is triggered when the debtor is in receipt of or becomes entitled to estate property, either before or after discharge. Since the court found that debtor submitted false testimony with regard to his prior dealings with bankruptcy court, the court disregarded his entire testimony as not credible and disregarded his explanations of his actions. After discussing the facts in detail, the court determined that revocation of discharge was warranted.

Galan demonstrates that it is always a bad idea to mislead the bankruptcy court. Also, debtor’s conduct could subject him to criminal prosecution.

Similarly to the above, a material fraud, which would have resulted in the denial of a debtor’s Chapter 7 discharge had it been known at the time of such discharge, can justify subsequent revocation of that discharge under Bankruptcy Code Section 727(d)(1).

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.

Homestead Exemption and Married Spouses

It is not uncommon for one spouse to seek bankruptcy relief under Chapter 7 or Chapter 13 of the Bankruptcy Code in a situation where title to the real property is held in both parties’ names. Generally, under such circumstances, the debtor typically claims a half interest in the property. Thus, the homestead exemption, under either New York law or federal bankruptcy exemptions, would be used to protect that interest. This creates an interesting legal issue since under New York’s Real Property Law both spouses hold an undivided interest in the entirety of the property. If so, does the homestead exemption have to protect all of the equity in the property?

In In re Naples, W.D.N.Y. Bk #14-10264, the bankruptcy trustee made precisely that argument. The trustee argued that since only one of the spouses had filed bankruptcy, and since the property was held by the parties as tenants by the entirety, creating undivided interest in each spouse, the debtor did not have sufficient homestead exemption to protect his equity in the property. The bankruptcy court disagreed. It held that under those circumstances, for purposes of valuing the debtor’s interest in the property, only one half interest needs to be valued and homestead exemption would be applied only to that half interest. The court reasoned that since the way the title is held creates limitations on each spouses to transfer title without consent of the other spouse, for the bankruptcy court’s valuation, only one half interest needs to be valued.

I think that this is a well thought-out result. If both spouses were filing for bankruptcy, each spouse would be able to apply their own exemption to any equity in the property, so if only one spouse files, that spouse should only need to protect that spouse’s half interest.

Bankruptcy and Judgments

One of the issues that periodically concerns my clients is the one of removing filed judgments after receiving bankruptcy discharge. Initially, filing for Chapter 7 bankruptcy won’t remove a judgment that has been already filed. Whether or not the debtor will need to remove it after receiving a discharge in either Chapter 7 or Chapter 13 Bankruptcy depends on each individual situation.

When a debtor files for Chapter 7 bankruptcy, that debtor is trying to remove his or her personal liability for repayment of certain debts. If a creditor sued the debtor and obtained a judgment before the bankruptcy case was filed, then the bankruptcy filing will eliminate that liability, but the judgment is a separate matter. It is a record of an official result of a lawsuit and remains filed with the court or local county clerk’s office. Even when the bankruptcy discharged liability for the debt, the record of the judgment remains in place.

In those situations, debtors have two different options. Option one is to do nothing. Assuming the underlying debt is has been discharged in your Chapter 7 bankruptcy case, the judgment remains nothing more than a piece of paper.
The creditor cannot freeze debtor’s bank account, seize wages, or take any further collection action. However, the judgment may remain on record as a valid lien against any property you owned at the time your Chapter 7 bankruptcy was filed. In New York, the judgment is automatically a lien against real property. The creditor can’t do anything with the lien, but it will need to be paid off in the event that you try to sell the property while the judgment is in place, or removed via a motion under Section 522(f) of the Bankruptcy Code. A judgment does not last forever. Judgments expire in 10 years under New York laws, but may be extended of an additional 10 year period.

Some debtors prefer to have discharged judgments removed. That brings us to option two. Under New York Debtor and Creditor Law Section 150, once a year has passed since the debtor’s discharge in bankruptcy, the debtor may apply for an order, directing that a discharge or a qualified discharge of record be marked upon the docket of the judgment. If the debtor fails to take this action, the judgment will remain on record with the New York Supreme Court or New York Civil Court and will remain enforceable.

Given the above, the debtors have options in dealing with any discharged judgments. Each debtor’s financial circumstances and other factors will factor into the decision whether to have any outstanding judgments removed. In my experience, unless the judgment is impairing the debtor’s interest in real property, vast majority of debtors will not seek to remove discharged judgments.

Banking After Bankruptcy

Most debtors are concerned about being able to open bank accounts after completing their bankruptcy and receiving their discharge. While most debtors will not have any difficulty opening new bank accounts, some debtors are unable to open a checking account after receiving their bankruptcy discharge. Typically, this is true for the debtors who have had a problematic history with their bank, involving bounced checks or excessive overdraft activity. As a result this negative information was reported to a check reporting company known as Chex Systems. Such negative information remains in this database service for five (5) years and is readily accessed and utilized by its members (usually financial institutions) in making decisions about who will be allowed to open new checking account.

While the debtors will not be removed from Chex Systems just because their debt to the bank was discharged in bankruptcy, as it is not required to remove a previously submitted, accurate report. However, Chex Systems is credit reporting agencies just like Equifax, Experian and Trans Union, and as such are required to follow the Fair Credit Reporting Act (“FCRA”) and other laws. The banks reporting to Chex Systems are required to regularly update their consumer reports with accurate information. Accordingly, when the debt that formed the basis of their negative report is discharged in bankruptcy, the member bank must report the account as “$0.00 balance due, discharged in bankruptcy”, or something similar. If this is not done, there is a dispute procedure that is very similar to the procedure employed to fix a credit report that is includes inaccurate, post-bankruptcy entries:

Step 1: Order a copy of your consumer report from Chex Systems, whose mailing address for disputes is: 7805 Hudson Road, Suite 100, Woodbury, MN 55125.

Step 2: Review the Chex Systems consumer report for accuracy, making sure that each discharged debt is reported as “$0.00 balance due, discharged in bankruptcy”.

Step 3: If an inaccurate entry is noted, you should send to Chex Systems, preferably by certified mail:

A copy of the Chex Systems report, with the inaccurate information highlighted or flagged in some fashion;

A copy of your bankruptcy discharge;

A copy of Schedules “D”, “E” and “F” from your bankruptcy petition;

A letter explaining that the disputed item is no longer accurate, and that it should be reported as “$0.00 balance due, discharged in bankruptcy”.

Step 4: Chex Systems will have 30 days to investigate the dispute. During this time the FCRA requires it to contact the member bank to verify that the account now has a $0.00 balance due because of the bankruptcy Discharge.

Assuming that Chex Systems and the member bank follow the law, the above steps should result in the previously reported negative information either being deleted or corrected so that it no longer acts as an impediment to the debtor opening a checking account.

In order to prevent this type of a problem, prior to an actual bankruptcy filing I advise my clients to open a checking account in a bank where they do not owe any money. Debtors will be able to use this new account after their bankruptcy filing without any difficulty.

Upcoming Chapter 7 and Chapter 13 Bankruptcy Filing Fees Increases

It seems inevitable that bankruptcy filing fees are going up again. The Judicial Conference which determines the amount of various filing fees associated with bankruptcy cases has approved a fee increase which will be effective on June 1, 2014.

The fees for filing a chapter 7 case will increase from $306.00 to $335.00. The fees for filing a chapter 13 case will increase from $281.00 to $310.00. This is a $29.00 increase in the filing fees for both Chapter 7 and Chapter 13 Bankruptcies.

The fees for filing an adversary proceeding will increase as well to $350.00. However, debtors are not charged filing fees for adversary proceedings. Chapter 11 filing fees will increase to $1,717.00.

Unfortunately, it will get more and more expensive for the debtors to achieve any relief from their debts.

Debtors and Failure to Turnover Nonexempt Assets

In Chapter 7 bankruptcy cases where debtors have nonexempt assets, debtors have an obligation to transfer those assets to the bankruptcy trustee. It is very common for such assets to be debtors’ tax refunds. In this situation, at the meeting of the creditors, debtors are asked to sign a stipulation which is usually incorporated into a subsequent court order, agreeing to turn nonexempt tax refunds, or a part of them, to the bankruptcy trustee. If debtors do not do so, they are subject to serious consequences which may include loss of their discharge, contempt of court or monetary penalties. The loss of discharge is the most serious penalty from the debtor’s point of view, since it will leave the debts nondischargeable in this or any subsequent bankruptcy that the debtor may file.

But what if the debtors are unable to turn over such assets due to financial reasons? What if the tax refunds were used for living expenses since debtors simply had no other choice?

This issue was recently addressed in In Re Swan, Case No. 08-11210 (W.D.N.Y. 2014), where Judge Michael J. Kaplan had to decide what the consequences should be for the debtors who had failed to turn over nonexempt portion of their tax refunds to the bankruptcy trustee. The Chapter 7 trustee sought denial of discharge, as well as a finding of contempt of court and monetary penalties. Judge Kaplan held that in the absence of dishonesty on the part of the debtors, loss of discharge would be too harsh of a remedy and the court should not automatically deny or vacate discharge. Judge Kaplan held that if failure to turn over the assets is not as a result of dishonest conduct on the part of the debtors, the appropriate remedy is a monetary judgment that the trustee would be free to collect. Further, Judge Kaplan also held that if the debtors are unable to turn over such assets to the trustee, they have an obligation to seek immediate relief from the Court.

This case further confirms that debtors always have to try to follow the court’s orders and, if they are unable to comply with them, they have to seek relief from the court. While the debtors in Swan did not lose their discharge, they were held in contempt of court and were subject to monetary penalties. All of this could have been avoided if they kept their bankruptcy attorney involved in the case and notified him of their financial difficulties.

Chapter 13 Bankruptcy, Co-Debtors and Automatic Stay

I am often asked if automatic stay in bankruptcy will protect debtor’s cosigner, otherwise known as co-debtors, from creditors. The answer to that question depends on a number of factors and the type of bankruptcy filed.

Typically, cosigner liability comes into being after debtor’s friend or relative was asked to cosign a loan, so that debtor could obtain credit. If the debtor is forced to file a bankruptcy sometime thereafter, the following is likely to occur.

In order for the automatic stay provided by 11 U.S.C. §1301 to protect the co-debtor, the debtor must file a Chapter 13 Bankruptcy. Further, the debt filed on must be a “consumer” debt. To be a consumer debt, the debt must have been for the personal, household or family use of the person you cosigned for. If the loan cosigned for was to obtain money for a business, there is no protection for the cosigner. Further, even if the debtor is paying this bill in their Chapter 13 bankruptcy plan, the creditor can still collect from the cosigner.

Further, the law specifically refers to co-debtors who are “individuals,” meaning people. So, if the co-debtor is a business entity, such as a corporation or LLC, the automatic stay does not protect the co-debtor. This can be important where an individual business owner is filing Chapter 13 Bankruptcy, but their business is not filing for bankruptcy protection.

Even if the debtor files a Chapter 13 Bankruptcy, the plan must adequately protect the creditor. “Adequate protection” in most cases means that, in most cases, that particluar creditor must be paid in full. If the plan does not pay the debt in full, then the creditor can ask the court to lift the automatic stay. Once the stay is lifted, the creditor can pursue the cosigner for the unpaid amount. The co-debtor is protected during the life of the bankruptcy, but once the bankruptcy is over, the co-debtor remains liable for the unpaid debt. For example, if the bankruptcy payment plan pays 25% of the debt, the co-debtor remains liable for the other 75% of the debt. For this reason, some bankruptcy payment plans provide for payment of joint debts in full in order to protect the co-debtor after the bankruptcy case is over.

A co-debtor stay is only available in a Chapter 13 Bankruptcy case. If the debtor files a Chapter 7 Bankruptcy, the automatic stay will not apply and once the debtor receives a discharge, the cosigner will be liable for the entire unpaid balance. Further, because of the discharge, cosigner will not be able to receive any money from the debtor. The co-debtor stay lifts at the end of the bankruptcy case, or when the case is dismissed, or when the case is converted to Chapter 7 bankruptcy or Chapter 11 Bankruptcy. After the stay is lifted, the creditor may pursue the co-debtor for payment of any unpaid portion of the debt.

If a creditor knowingly violates the automatic stay protecting the co-debtor, the Bankruptcy Court may hold the creditor in contempt of court, just as if the creditor had violated the automatic stay protecting the debtor. The Court may fine against the creditor and may award money damages to the injured party. Furthermore, any collections actions taken by a creditor in violation of the co-debtor stay are void and unenforceable.

Thus, it is usually a bad idea to cosign any debts. While the debtor may have every intention to pay the debt at the time it is incurred, this may not be true in the future. Co-signer has no control over repayment and oftern enough does not not know when the debtor defaults. Further, any late payments or missed payments will be reported on cosigner’s credit.

Fraudulent Conveyances and Bankruptcy

One of the issues that represents a significant problems for bankruptcy attorneys is that of fraudulent conveyances. Generally, a fraudulent conveyance is a transfer of money or property from a debtor to someone or something else when either (1) the debtor intends to defraud creditors, or (2) the debtor received less than a reasonably equivalent value in exchange for the transfer, and made it while insolvent. For example, if a husband transfers his house out of his name to the wife so his creditors wouldn’t get it, the transfer is a fraudulent conveyance. Such transfers can create quite a few problems in bankruptcy.

The limitations period for avoidance of fraudulent conveyances has changed over the years, but currently it is two years under the Bankruptcy Code (Section 548) and whatever longer period is available under state law (Section 544). Since I practice in New York, I will use its laws as an example. New York has a six-year statute of limitations for avoidance of fraudulent conveyances.

Earlier this year, in In re Panepinto, Case No. 12-11230 (W.D.N.Y. 2013), Judge Kaplan of the Bankruptcy Court, Western District of New York, found that a transfer of a house to the debtor’s spouse 4 years prior to the bankruptcy filing was a fraudulent conveyance. In 2008, a judgment creditor was seeking to collect on a debt owed by Mrs. Panepinto, who owned a house with no mortgages or other liens encumbering the property. So, to thwart her judgment creditor, she transferred the house to her husband with no consideration for the transfer.

Last year, Mrs. Panepinto filed for Chapter 13 bankruptcy, and her judgment creditor sought to set aside the transfer as a fraudulent conveyance under New York Debtor and Creditor Law §273. The Bankruptcy Court sustained the judgment creditor’s challenge to the transfer. The reason the timing of the transfer is significant is because at the time of the transfer New York’s homestead exemption was lower than today, $50,000.00 rather than $75,000.00. Depending on what the value of the property was at the time the bankruptcy was filed, a portion of the value of the house may not be exempt. Since the court did not have this information presented, the court reserved its decision on the amount of the exemption pending proof of its value.

The lesson is that before transferring ownership in property, a debtor should seek advice of an attorney since any improper transfers may change status of assets from exempt to non-exempt or created other problems if subsequent bankruptcy is filed.

Changes to the Bankruptcy Means Test as of April 1, 2013

Once again, the means test figures for median income have changed as of April 1, 2013. In New York, it means that the amount of income that the debtor can have before being forced into a Chapter 13 Bankruptcy is going to increase.

Through March 31, 2013, a single debtor in New York could have $46,821 in income in income and still be able to file Chapter 7 Bankruptcy. Starting April 1, 2013, that figure has been increased to $47,790. Similar increases will take place for all family sizes. The comparison of the existing and new income limits is below.

Old Income Limits

FAMILY SIZE

1 EARNER 2 PEOPLE 3 PEOPLE 4 PEOPLE *

$46,821 $58,106 $67,652 $81,522

New Income Limits

FAMILY SIZE

1 EARNER 2 PEOPLE 3 PEOPLE 4 PEOPLE *

$47,790 $59,308 $69,052 $83,209

* Add $7,500 for each individual in excess of 4.

While the increases are not large, they are an improvement on the last set of income limits. The reason for a slight growth in the median income is the slight growth in the earnings of an average American family. Since the economy is down, employers do not give employees significant wages increases. As a result, the American median family income has grown only slightly, and means test figures increased only moderately.

If you are contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, New York, 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.

Top Five Things Not To Do Before Filing Bankruptcy

Many people try to engage in financial planning once they make a decision to file either Chapter 7 or Chapter 13 bankruptcy. While such planning can be helpful, there are many potential dangers for the unwary debtors who do not involve a bankruptcy attorney in this process. Here is a list of top five things not do since they may cause significant problems in your bankruptcy case.

Number 5: Stop using credit cards once you decide to file.

In bankruptcy, honesty is the best policy. Using credit cards when you have no intention to repay may result in the debt being nondischargeable, especially where credit cards are being used to purchase luxury goods or for vacations, or cash withdrawals are made. The bankruptcy code gives credit card issuers a number of advantages when credit cards are used just prior to filing bankruptcy. If a creditor decides to file objections, the bankruptcy court may determine that the debt is nondischargeable. Before you use a credit card convenience check, transfer a credit card balance, take a cash advance, or go on a spending spree, debtors should speak with a bankruptcy attorney.

Number 4: Don’t transfer property before filing bankruptcy.

The bankruptcy petition requires that debtors identify all financial transfers made before their bankruptcy filing. Further, during a typical meeting of the creditors, the bankruptcy trustee will usually ask about any transfers, and will ask debtors about transfers of real property made within the last 6 years. The bankruptcy trustee will review any transfers within the last year, and any transfers that violate preference rules can be voided by the trustee. If the transfer is voided, the debtor may lose the right to protect such property, and the recipient of the property will have to return that property to the trustee. Before selling or transferring property, debtors should speak with a bankruptcy attorney.

Number 3: Don’t repay loans to friends or family.

Because of the preference rules, any transactions such as repayment of loans to relatives or friends can be voided by the bankruptcy trustee as preference. Once the trustee determines that the transaction is a preference, the trustee then can can recover such funds from your family members or friends, and use them to pay your creditors. Before paying back debts owed to family members or friends, debtors should speak with a bankruptcy attorney.

Number 2: Don’t pay more than $600 to one creditor.

Like payments to family members or friends, any payments that exceed $600 and made to any one creditor within 90 days of the bankruptcy filing, can be avoided as a preference. While those payments will be recovered by the trustee from the recipients, it may make more sense to simply not make such payments and preserve the money. Before paying making significant payments to their creditors within 90 days prior to their bankruptcy filing, debtors should speak with a bankruptcy attorney.

Number 1: Don’t cash out retirement plans or 401k plans to pay creditors.

Since retirement plans are fully protected by the Bankruptcy Code, debtors should not withdraw retirement funds to pay creditors. Not only such payments are likely to be voided as preferences, they are also likely to result in taxable consequences to the debtors. Also, once the money is withdrawn, it may lose its protected status, and it is possible that either the creditors or, eventually, bankruptcy trustee may take it.

The bankruptcy code contains many dangers for the unwary. A bankruptcy attorney can help you avoid these common mistakes. It is always a good idea to engage in bankruptcy planning and discuss your financial situation with a bankruptcy attorney.