Articles Posted in Chp 7 Bankruptcy

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 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 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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