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Articles Posted in Chp 7 Bankruptcy

A debtor in a bankruptcy case had been romantically involved with a woman years before filing for bankruptcy. He needed money and asked the woman to lend him $30,000. The woman agreed and asked him to write up a list of his property. He did so, and the woman’s attorney prepared a loan agreement and attached the debtor’s property list. The list included personal items and items from the man’s landscaping business. Five years later, the debtor had repaid less than $5,000 before he defaulted. The woman then sued the debtor and secured a default judgment for $137,030.78.

DollarsThe debtor then filed for Chapter 7 bankruptcy. The woman filed an adversary proceeding against the debtor, asking the court to declare the debt non-dischargeable. She argued the debt was exempt from the debtor’s dischargeable debts under 11 U.S.C 523(a)(2)(B). The debtor moved to dismiss her claim. The woman then attempted to add a claim under 11 U.S.C. 523(a)(2)(A). The court dismissed the woman’s claim, and she appealed.

Discharges in Bankruptcy Claims

Not all of a debtor’s debts are discharged (releasing the debtor from personal liability) in bankruptcy cases. In a Chapter 7 bankruptcy case, there are certain kinds of debts that are excepted from discharge. That means that the debtor still has to repay those debts after bankruptcy. For example, debts for child support and alimony cannot be discharged, as well as most student loan debts (unless undue hardship is proven through a separate proceeding). Some of the non-dischargeable debts apply automatically, while others have to be requested by creditors in order to be exempt.

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In a recent case, a bankruptcy court considered how a trustee should proceed when a debtor fails to provide requested information. In that case, the debtor filed a Chapter 7 petition before she filed her tax returns for the previous year. A creditors’ meeting was then held, and the creditor told the debtor to send him a copy of her tax returns when she filed them and to not spend any of the refund she received.

Sheet of MoneyThe debtor obtained a discharge about two months later, in April. By September, the trustee still had not heard from the debtor or received her returns. He then requested and received a court order requiring the debtor to bring copies of her returns. The debtor did not comply. The trustee then filed a motion to revoke the debtor’s discharge. The debtor did not respond. The trustee moved for default judgment, and the debtor still did not respond.

The court held a hearing for the debtor to show why she should not be held in contempt, and she still failed to respond or attend the hearing. Despite this, the court decided to deny the default judgment motion and dismiss the proceeding against the debtor. The judge said the trustee should have filed for contempt or attempted other means to compel the debtor before requesting to revoke her discharge. The trustee appealed the decision.

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A debtor, who had a bachelor’s degree in finance and an MBA degree and had worked in the financial industry for almost a decade, filed for Chapter 7 bankruptcy in 2013. While working as a financial advisor, he personally invested in a real estate venture, in which he contributed $65,0000 for a 49% interest in the company. When the man filed his bankruptcy petition, he estimated his real estate investment interest was worth $2,500. He also claimed he did not have any non-exempt assets that were worth distributing.

CourtroomIn a recent opinion, a federal appeals court considered whether the debtor’s estimation that the value of his interest in the real estate investment company was 4% of his initial capital contribution warranted a denial of a discharge of his bankruptcy case. After the trustee learned that the man had an interest in the company, the trustee told the creditors there would likely be assets available for distribution. The creditors then filed an adversary complaint against the man, alleging that he intentionally misrepresented the value of his interest in the land by more than 95 percent. They requested a denial of discharge under the false oath provision of 11 U.S.C. § 727(a)(4).

The debtor explained that he arrived at this number by taking the largest annual distribution he received, which was $483, rounding it up to $500, and multiplying it by a capitalization rate of five. He acknowledged that the manager of the company would have been able to better evaluate the company’s worth, and he never asked him for his evaluation. The man’s most recent tax return showed an individual capital account in the venture of $67,555. The man claimed he did not make a false statement in valuing his interest, and his method of calculation was reasonable.

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A federal bankruptcy appellate panel recently issued a decision addressing whether payments made toward improvements on a home were exempt in a chapter 7 bankruptcy claim. The appellate court determined the payments made toward improvements may have been non-exempt if they were intended to defraud creditors, and the debtors’ equity should be reduced accordingly.

ToolsDebtors Made Improvements on Home Paid Through Family Members’ Bank Accounts

A husband and wife made several improvements on their home over a period of time. Their daughter opened a checking account at a bank at the time, and her parents made large deposits into the account and paid for some improvements on the home, totaling almost $50,000. Improvements were also funded by other family members.

Soon afterward, the parents filed a petition for relief under chapter 7 of the bankruptcy code. They valued their home at $200,000 and listed that they had a remaining mortgage on the home of $133,725. Thus, the debtors argued the equity in their home was $66,275, and this amount was exempt under the state’s homestead exception. The trustee objected, claiming the money that had been transferred through their daughter’s account did not qualify under the homestead exemption under 11 U.S.C. Section 522(o) because the husband and wife had transferred the money into the property to hinder, delay, or defraud creditors.

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The United States Court of Appeals for the Fourth Circuit recently published a decision that affirmed a bankruptcy court’s ruling to deny a US Trustee’s motion to dismiss a Chapter 7 bankruptcy case as an abuse of the bankruptcy code. The trustee questioned the propriety of the standardized instructions for preparing a Chapter 7 bankruptcy as applied to debtors who incurred less than the “National and Local Standard Amount” for exemptible expenses but were specifically instructed by the form to use the standard amounts rather than their actual expenses.

FormsBy ruling that the plain language of the statute resulted in a fair and reasonable policy, the court found no merit to the bankruptcy administrator’s arguments in the motion. As a result of the most recent ruling, the debtor’s bankruptcy will not be reversed.

Bankruptcy Debtors Face an Objection After Following Clear Instructions on a Mandatory Form

The debtors in the case of Lynch v. Jackson are a married couple from North Carolina who filed a petition under Chapter 7 of the bankruptcy code in 2015 to seek relief from their debts. Since their family had an above-average income for the region, the debtors were required to submit a “means test” to the court to determine their eligibility for Chapter 7 bankruptcy relief.

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A panel of the United States Court of Appeals for the Sixth Circuit recently published an opinion reversing a bankruptcy court’s decision to refuse a Chapter 7 debtor’s request to reopen his bankruptcy case nearly four years after he was granted a discharge. The debtor had asked the court to reopen his bankruptcy so that he could address judgment liens against his home that were not properly avoided during the bankruptcy, possibly by mistake.

dollarsAlthough the debtor could easily have removed the liens during the bankruptcy, none of his creditors objected to reopening the bankruptcy, and the code specifically allows for the reopening of a case to address the issue, the bankruptcy judge refused the debtor’s request, suggesting instead that the debtor could possibly obtain relief by suing his attorney for malpractice. The appellate panel acted more humanely and sympathetically than the bankruptcy judge, whom they reversed.

Ultimately allowing the case to be reopened, the panel remembered that bankruptcy laws exist to help debtors address their financial issues and move forward in life, while allowing creditors a fair chance to stake their claims if they choose. Since no creditors objected to the debtor’s request, the bankruptcy judge could not justify refusing the debtor’s request.

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A federal bankruptcy appellate panel recently released an opinion addressing an appeal filed by a pro se debtor who challenged the dismissal of his case. The appellate court found that it did not have jurisdiction to hear the man’s claims on appeal, but it addressed them anyway, holding that a federal bankruptcy judge did not abuse his discretion by dismissing the man’s bankruptcy case after his failure to submit the required accompanying documentation and schedules to the court after filing for bankruptcy.

Law BookThe Debtor Attempted To File for Bankruptcy Without the Help of an Attorney

The appellant in the case of In re Dan Lee was a man who filed a chapter 7 bankruptcy earlier this year, and he did so without hiring an attorney to prepare his bankruptcy petition. As a result, he filed the petition without ensuring that the required accompanying documentation was submitted with his filings.

After the initial filing, the court notified the man that he needed to file certain schedules and declarations with the court within a specified amount of time. The man did not comply with the request, and his case was dismissed after the deadline set by the court had expired.

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A panel of the U.S. Sixth Circuit Court of Appeals recently affirmed a bankruptcy court’s ruling to deny the discharge of a couple’s debts that had been requested as part of a Chapter 7 bankruptcy petition they filed in 2008 with the help of their attorney. The appeals court ruled that the decision by the bankruptcy court to deny the debtor’s requested discharge because of their failure to disclose their interests in several trusts, corporations, annuities, and other pieces of property owned by others was a legitimate response to the debtors’ apparent attempt to deceive the court as to the nature of their assets and liabilities. The attorney who prepared the initial petition had also been implicated in the ruling of the bankruptcy court and sanctioned for his role in concealing the debtors’ assets, although the debtors were held to their sworn statements and unable to pass full responsibility for the inaccuracies onto their former attorney.

Legal BooksDebtors Fail to Reveal Several Pieces of Property in 2008 Bankruptcy Petition

The debtors in the case of In re Blasingame are a married couple who sought the assistance of a bankruptcy attorney to file a Chapter 7 bankruptcy petition to address their debts in 2008. The attorney prepared a petition, the related schedules, and a Statement of Financial Affairs for the debtors, which were accompanied by affidavits signed and endorsed by the debtors under oath that swore to their knowledge and understanding of the information contained in the schedules, as well as their truthfulness. Throughout the bankruptcy process, the creditors challenged the statements and claims of the debtors, eventually demonstrating to the bankruptcy court that the debtors had knowingly made false statements on their petition.

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The United States Seventh Circuit Court of Appeals recently released a decision in a bankruptcy appeal that affirmed a lower court’s ruling that voided a debtor’s pre-filing transfer of a farm to her father, allowing the trustee to take partial possession of the property. The debtor’s claim that the property was given to her father in exchange for his cessation of unrelated legal proceedings against her was rejected by the appellate court as unjustified and not reasonably related to the value of the asset that was transferred before the debtor filed for bankruptcy.

FarmFourteen Months Before Debtor’s Bankruptcy, She Transfers a Farm to Her Father Without Compensation

The appellant in the case of Griswold v. Zeddun was a Chapter 7 bankruptcy debtor who appealed the bankruptcy court’s decision to avoid the transfer of a farm to her father before she filed for bankruptcy. The lower courts agreed that the transfer of the property was a “fraudulent transfer” under the meaning of the bankruptcy code, since the debtor was not adequately compensated for the property, giving the appearance that the transfer was made to allow the debtor and her father to avoid the jurisdiction of the bankruptcy court. The debtor had claimed that the transfer was legitimate because her father assumed the debt on the property, and he agreed to stop pursuing an unrelated legal claim against her as compensation for the remaining equity in the property.

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Consumers who are considering debt relief options and possibly filing for bankruptcy should be aware of the various exemptions that are available to protect certain assets from forfeiture to creditors as part of the bankruptcy process. An important point not to be misunderstood is that although personal IRA retirement accounts are protected from being taken as part of a Chapter 7 bankruptcy, an account that has been inherited by the bankruptcy debtor will be treated as any other non-exempt asset and may be seized as part of a Chapter 7 bankruptcy proceeding. Because of this rule, people thinking of bankruptcy should carefully consider all of their options and seek qualified advice before filing a petition.

monies-1498709Personal Retirement Accounts and Some Inherited Assets Are Exempt From Chapter 7 Bankruptcy

As noted in a recently posted news report outlining one man’s experience with filing for bankruptcy while trying to protect an inherited IRA account, the U.S. Supreme Court has ruled that an inherited IRA retirement account does not include the same protections as an account that was actually earned by the bankruptcy filer. This means that bankruptcy creditors will have the same access to an inherited IRA as they would to a bank account or other asset in the debtor’s name. The article correctly notes that there are some exceptions to the rule. For example, a surviving spouse who inherits a 401(k) from their deceased husband or wife is able to treat the account as their own for bankruptcy purposes. Additionally, some states have independently passed laws that protect their citizens’ inherited accounts.

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