Articles Posted in Bankruptcy Case Law

In a recent case of interest to Indiana bankruptcy petitioners, a federal court of appeals considered whether debtors had to return money withdrawn from an individual retirement account (IRA) after the bankruptcy case was filed. The debtors (a husband and wife) filed for Chapter 7 bankruptcy and claimed an exemption for money in an IRA account. After the debtors claimed the exemption, no party objected to the claimed exemptions, and the IRA money was deemed exempt. However, it later became known that the debtors withdrew all of the money from the IRA and used the money after filing for bankruptcy.

Stacks of CashUnder that state’s law, money held in an IRA is normally exempt from the bankruptcy estate because tax-deferred or tax-exempt assets in an IRA are generally exempt from the bankruptcy estate. However, under that state’s law, the money in an IRA is only exempt if it is rolled over into another retirement account within 60 days.

In this case, the debtors did not put the money into another retirement account. One party later objected to the exemption, contending that the debtors had to turn over to the bankruptcy estate the $133,434.64 that was withdrawn from the IRA. The debtors argued that since the money was already deemed exempted, it was permanently removed from the estate.

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One of the most common issues that comes up in Kentucky bankruptcy cases is what constitutes an exemption under the bankruptcy code. A recent opinion from one state’s supreme court considered whether a debtor could claim an exemption for funds in his health savings account. In the case, the debtor claimed an exemption in his Chapter 7 bankruptcy claim for funds in his health savings account of $14,319.61. The trustee objected to the exemption, and the state’s supreme court considered the issue.

DoctorThe statute at issue stated that a debtor could claim an exemption for “disability or illness benefits” or for “benefits paid or payable for medical, surgical, or hospital care to the extent that they are used or will be used to pay for the care.” The statutes did not explicitly state whether health savings accounts specifically qualified under those definitions. The intent of this exemption and other exemptions is to prevent the debtor and dependents from becoming destitute.

The court held that a debtor can claim an exemption for a health savings account if it is used or will be used to pay for medical care as described in the statute. In this case, the debtor withdrew funds from the health savings account solely to pay for medical expenses. Therefore, the funds in his health savings account were exempted under the statute.

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In a recent case, a federal appellate court considered whether a trustee could revoke a debtor’s discharge 15 months after the discharge was granted. When the debtor filed a Chapter 7 bankruptcy claim, he did not list his own home as an asset. Despite this, the petition continued without any other party taking notice, and he eventually received a discharge of his debts under 11 U.S.C. 727(a). After the debtor obtained the discharge, the trustee discovered the fraud that had occurred. The trustee filed an adversary proceeding against the debtor and requested that his discharge be revoked.

CalendarUnder 11 U.S.C. 727(d)(1), a court can revoke a discharge if the discharge was obtained through fraud that was not discovered until after the discharge was granted. In order to seek relief under section 727(d)(1), the statute states that the request for revocation must be filed within one year after the discharge is granted. In this case, the trustee filed the adversary proceeding about 15 months after the discharge was granted, well beyond the one-year deadline. However, when the adversary proceeding was filed against the debtor, the debtor never argued that the request was filed too late.

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In a recent case, a federal appeals court determined that the Bankruptcy Code allows a bankruptcy court to grant a short grace period after the expiration of a Chapter 13 debtor’s payment plan to complete the payment of a debt. In the case, the debtors had filed a Chapter 13 bankruptcy petition, and the court approved their repayment plan. Their plan required payments of $2,485 every month for five years. Later, the monthly payment increased to $3,017 because of an increase in mortgage payments. They made all of the required payments, and at the end of the five-year period, they had paid $174,104, surpassing their original anticipated plan base of $174,059.24.

HourglassDespite this, the trustee alleged that they still owed another $1,123—but the trustee said that she would not object to the debtors paying off the remaining debt. The debtors paid the remaining debt within 16 days. However, after the payment, one creditor argued that the late payment was invalid because the Bankruptcy Code requires all payments to be made within five years.

The court held that bankruptcy courts can grant a reasonable grace period for debtors to cure an arrearage. The court identified a non-exhaustive list of factors to consider in deciding whether to grant a grace period. They were:  1) whether the debtor substantially complied with the payment plan; 2) the debtor’s ability to complete the plan; 3) whether an extension would prejudice any creditors; 4) whether the debtor was to blame; and 5) the availability of other remedies.

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In a recent case, a federal court of appeals considered whether a debtor’s tax debt from his late-filed tax “returns” was dischargeable in his later bankruptcy petition. The debtor had failed to file his federal tax returns when they were due in 2000, 2001, and 2002. In 2004, the IRS investigated and assessed his tax liability. Soon afterward, the debtor filed his IRS 1040 forms for 2000 and 2001, and eventually he also submitted them for 2002. He had filed his state tax returns for those years.

Tax FormsIn 2010, the debtor filed for Chapter 7 bankruptcy, and he received a discharge for his state tax liability—meaning that he was no longer personally liable for paying the state taxes that he owed from previous years—but not for his 2000, 2001, and 2002 tax liability. He later filed for Chapter 13 bankruptcy, and when he filed the second petition, he claimed that his federal tax liabilities for those years should have been discharged in his Chapter 7 proceeding. However, a federal appeals court determined that those debts were not dischargeable because he failed to file his tax returns on time for 2000, 2001, and 2002, and when he later filed his 1040 forms, they were not considered “returns” under the Bankruptcy Code.

Taxes and Bankruptcy Petitions

Generally, when a debtor files a Chapter 7 bankruptcy claim, the debtor is not personally liable for debts incurred before filing the petition. Those debts are part of the bankruptcy estate and are viewed as “discharged.” Yet there are certain debts that are not dischargeable.

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In a recent case, a federal court of appeals determined that a debtor’s monthly annuity payments were part of the bankruptcy estate and were not exempt under state law. The debtor filed a Chapter 7 bankruptcy claim and listed as an asset a $100,000 single premium annuity. She had purchased the annuity from Kansas City Life Insurance Company for $100,000 a few months after her husband died. She had sold her house and used the money to purchase the annuity. She elected to receive a monthly payment of $436 starting 30 days after she purchased the annuity, which would continue for the rest of her life. When the debtor filed her bankruptcy claim, she claimed the annuity as an exemption. The trustee objected, arguing it should not be exempted.

Cash MoneyThe debtor had claimed the exemption under a state bankruptcy exemption. The law allowed exemptions for plans that are necessary for the debtor’s support or the debtor’s dependent’s support, and that were made “on account of illness, disability, death, age or length of service.” In this case, the court found the plan was not made on account of illness, disability, death, age, or length of service.

The woman first argued she had purchased the annuity on account of death, since she purchased the annuity after her husband’s death to replace his income. The court explained that her reason for purchasing the plan was irrelevant. In contrast to a plan that is triggered upon the death of a certain person, here, the payments were not triggered by the husband’s death. For the same reason, the plan was also not made on account of age. The question the court asked was not what motivated her to purchase the annuity but instead what triggered her right to receive payments. In this case, the payments began 30 days after the annuity was issued, since that was when she chose the payments to begin. For these reasons, the court rejected the exemption and deemed the annuity part of the estate.

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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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Filing a bankruptcy claim requires great attention to detail and a deep understanding of complicated issues. In a recent case, one woman was prevented from filing a personal injury claim because she failed to properly exempt the claim in her bankruptcy schedules.

PaperworkThe woman was injured in a car accident and subsequently had to undergo surgery for her injuries. She later filed a Chapter 7 bankruptcy claim, and about two years later, she filed a lawsuit against another individual alleging that he caused the car accident. The defendant then moved to dismiss the claim arguing that the woman could not bring the claim. He claimed that because the woman had filed a Chapter 7 bankruptcy petition two years earlier, only the bankruptcy trustee could file a claim, because she had not exempted it in her bankruptcy case.

When a person files bankruptcy,  she is required to list all of her assets in the bankruptcy schedules.  A personal injury claim is considered an asset that must be listed on Schedule B.  Assets which the debtor claims as exempt are then listed on Schedule C, along with a citation to the statute that provides for the exemption.  In this case, the debtor listed this claim on Schedules B and C under the heading: “other liquidated debts owed to debtor, as: “proceeds related to claims or causes of action that may be asserted by the debtor.” The woman argued her personal injury claim fell within the language she listed, and that she had properly exempted her claim from the bankruptcy estate.

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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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