times the subject of bankruptcy seems baffling in its complexity. It
is. Actually the basic principals of bankruptcy are fairly simple
even though the federal statutes on bankruptcy are extensive, and
the courts have complicated the issues. The reason that the laws are
so complex is because in an effort at social engineering, the
politician lawmakers want to cover every possible contingency. The
very complexity of the Bankruptcy Code gives the lawyers ample
opportunity to try to obtain interpretation of the law which best
serves their clients interest. This results in extensive litigation
and occasionally in interpretations of the law which were not what
the congressional legislature intended. Legislation from the bench
at its finest. Nonetheless, this in turn results in additional
legislation, which results in additional litigation and on and on.
The bottom line is a bottomless money pit. Nevertheless, the
underlying principals are not as complex as the law makes them seem.
Here we will briefly discuss the personal nature of bankruptcy
without rendering legal advice.
The concept of bankruptcy is an old one in the English common law.
If a person could not pay his debts, his creditors hauled him into
court, took all of his assets and belongings, and used those assets
and belongings to satisfy their debts. If the assets were
insufficient to satisfy the debts, the debtor was taken from the
bankruptcy court to debtors prison. Since this is a rather extreme
remedy, Article 1 Section 8 of the U.S. Constitution gives the
Congress the right to establish "uniform Laws on the subject of
Bankruptcies throughout the United States."
As the popularity of debtors prison declined, the original concept
of giving the debtor a fresh start became one of the primary
purposes of the bankruptcy process. It is important to remember that
a bankruptcy is a personal action which at time of discharge gives
the petitioner (formerly the debtor) a fresh start. The property
owned by the petitioner does not get the fresh start, the individual
The fact that bankruptcy is a personal action may shed some light on
the effect of a homestead protection in a bankruptcy proceeding. The
bankruptcy code acknowledges the validity of homestead protection. A
'homestead exemption' is a personal exemption which, in an effort to
preserve a person's home, protects a certain amount of an
individual's equity in the homestead property. State law determines
the extent and effect of a homestead exemption. Thus, if state law
says that a person can declare a homestead up to $125,000 and if
there is less than $125,000 equity in the property, that equity in
the property is protected by the homestead exemption. This principal
under state law operates without regard to the Federal Bankruptcy
to the new Bankruptcy Code Makes It Tougher to File
Bankruptcy - Effective November 2005
law changed dramatically in November. A
sweeping overhaul of the nation's bankruptcy laws makes it harder to
avoid paying creditors and guts a long-standing Florida
that protects homes from being sold to pay off debts, therefore now
is the time to protect your home from the possibility of future
relief will not be available to some; will be more limited in scope;
and will be more expensive. Debts that are dischargeable under the
present law will survive a bankruptcy discharge under the new law.
an eight year long battle funded by the banking and credit card
industries, who contributed more than $40 million to federal
election campaigns during this period, the United States
Bankruptcy Code has finally been amended. The new bill was
approved by the Senate in March 2005 and by the House on April 14,
2005. The changes to the Bankruptcy Code took effect six
months after the date President Bush signed the bill. Therefore,
the new bankruptcy law took effect in November 2005, but will be
in full force by January 1, 2006. Florida Homestead Services can
protect your property now from unforseen circumstances in the
of the bankruptcy bill include:
who earn more than the median income earned in their state must
pass a means test in order to file Chapter 7 bankruptcy. If
the debtor earns more than the median income in his or her state,
secured debt and necessities (alimony, child support, living
expenses, etc.) are subtracted from the debtor's monthly income to
determine what is left over for repayment of unsecured debt.
If it is determined that a debtor can pay the lesser of $10,000
over a 60 month period ($100 per month) or 25 percent of his debt,
which must be at least $6,000, then he must file Chapter 13
bankruptcy and repay some or all of his unsecured debt over a five
year period. If the debtor does not pass the means test, he
can file Chapter 7 just as with the old law and have much or all
of his unsecured debt erased.
will be required to pay for credit counseling. Those
contemplating filing bankruptcy must obtain a briefing about
credit counseling services not more than 180 days before filing
bankruptcy. The banking and credit card industries wanted
this provision included to encourage those contemplating
bankruptcy to sign up for credit counseling instead. This
provision applies to everyone regardless of whether or not they
earn at least the median income in their state.
the media and certain politicians have been warning the public
that the new bankruptcy code will place undue hardship on the poor
and women, and be an economic disaster for the country, the
American Bankruptcy Institute predicts that the new revisions will
only affect 30,000 to 210,000 of the 1.5 million people who file
bankruptcy each year.
should consider filing before the new law is effective? Those whose
debts include any of the following kinds of claims:
present law allows discharge of tax liability for tax years more
than 3 years prior to the bankruptcy filing, even if the returns
have not been filed. The new law eliminates this provision.
incurred by dishonesty:
currently, a debtor can discharge, without challenge, debts that
the creditor claims were incurred by fraud, breach of fiduciary
duty, or intentional malicious acts. This provision has kept
credit card companies from disputing the dischargeability of
credit card debt. The Chapter 13 "super discharge"
will disappear under the new law.
fund employment taxes:
current Chapter 13 discharges even priority taxes such as the
liability of a corporate officer for the withholding portion of
employment tax liability if the taxing authority does not file a
timely claim. Under the new law, tax liabilities for which no
claim is filed will survive the bankruptcy.
the vehicle was purchased in the past two years and is now worth
markedly less than the loan balance. The ability to strip down a
car loan in Chapter 13, or redeem the car for its present value
disappear under the new law on vehicles purchased within 2 1/2
years of the bankruptcy filing.
arising from a divorce:
property division obligations or indemnity provisions will be
non dischargeable in Chapter 7 but remain dischargeable in
new bankruptcy law impacts homestead protection only in
bankruptcy court and does not affect the homestead protections that
are currently available in a Florida state court collection
proceeding. When the law
goes into effect, you cannot use the exemptions in your state of
residence unless you have lived there at least 2 years, unless you
act now and claim your current lawful exemptions. Fears
that once the Bankruptcy Reform Act went into effect, more and more
creditors will try to force people into involuntary bankruptcy in
order to strip debtors of exemptions otherwise available under Florida
Many debtors who enjoyed unlimited homestead protection in a state
court would forfeit homestead protection above $125,000 if they were
forced into federal bankruptcy court by a creditor who filed in an
"involuntary petition". One creditor with an undisputed
and liquidated claim can file a petition for involuntary bankruptcy,
however, fears of an involuntary bankruptcy epidemic under the new
bankruptcy law may be exaggerated, and the new law may make it even
more difficult for creditors to impose bankruptcy upon individuals.
to the new Act, a debtor could threaten a creditor with bankruptcy.
After the Bankruptcy Reform Act, creditors will likely threaten to
force a debtor into bankruptcy so the debtor’s assets can be
picked clean. One issue overlooked by many lawyers is the
common requirement that involuntary bankruptcy is far from automatic
and involuntary petitions must be filed by creditors in good faith.
Most courts have stated that involuntary bankruptcy may not in good
faith be used as a collection hammer by an aggressive creditor, and
the involuntary bankruptcy must serve a bankruptcy purpose. It must
benefit creditors as a whole. Some provisions are effective
immediately. One important change immediately effective is the
$125,000 limit on protected homestead equity for those debtors who
have owned their residence less than 40 months. Anyone with
homestead equity greater than $125,000 and does not meet the 40
month waiting period and who is considering filing bankruptcy before
the new bankruptcy law goes into effect should file bankruptcy
that the new bankruptcy law does not change Florida's
homestead laws or asset exemptions in any state court proceedings.
The changes are important only if a debtor files in federal
Kansas, Texas, Florida, Iowa, and South Dakota have unlimited
homestead protection exemptions. That allows people to file for
bankruptcy and keep their homes and property in those states
sheltered from creditors. Still,
Floridians will be able to shield homes from creditors under several
scenarios, even if the bankruptcy legislation is enacted, but it
would be very wise to file now instead of wait until the last minute
to claim your exemptions.
new bankruptcy law partially closes a loophole popular with some
wealthy debtors. It used to work like this: when you know you are
going to file for bankruptcy, move to Florida,
or South Dakota
— the states that
have an unlimited "homestead" protection. This means that
no matter how much your house is worth, it can't be touched by
creditors as long as you make
When the new law takes effect in November, you have to live in the
home for at least two years before you file for bankruptcy for the
home to be "exempt." Why wait?
the new law, the tax exemption portion is limited to $125,000 if the
property was acquired within the previous 1215 days (3.3
years). The cap is not applicable to any interest transferred from a
debtor's previous principal residence (which was acquired prior to
the beginning of such 1215-day period). So if you have owned your
home more than 3.3 years before filing a bankruptcy, it is
completely exempt in the states listed above. The
limitation on the homestead exemption may mean that future creditors
could seize every dollar above the $125,000 threshold should a
debtor be forced to sell his or her home to pay the creditor.
protection allowed by the State of Florida may not apply if you file
for bankruptcy. The new federal bankruptcy law will have absolutely
no effect on Florida's homestead protection outside of bankruptcy
Florida forced sales are against the Constitution but the homestead
claim must be legally filed!
is where Florida Homestead Services can help you. Don't wait!
example, Floridians who have owned their homes for 40 months or
longer will be able to keep their unlimited homestead exemption if
they have filed and made the proper claim. Homestead exemption for
ad valorem property tax purposes does not automatically protect your
home from creditors, liens, judgments or bankruptcy. Floridians who
file for bankruptcy and homestead exemption for asset protection
before the President signs the legislation will be able to keep the
unlimited exemption. And married couples -- in cases where only one
partner is bankrupt -- will be able to shield their home under a
different exemption. Florida's future homebuyers, however, will lose
the homestead's unlimited protection in bankruptcy cases unless they
claim the exemption now.
Protection – The New 3 Year Four Month Rule
Another notable feature of the Senate Bankruptcy Bill involves the
homestead protection available in many states. Florida, Texas,
Iowa, for example, protect unlimited amounts of
homestead value. Homestead
would still be protected to the extent of existing state law if it
has been owned and lived in for at least 3 years and 4 months.
It is important to note that state law homestead protection will
still apply so long as the debtor does not declare bankruptcy.
The Bill has no negative impact on a situation where a debtor has
lived in their home for 3 years and 4 months, even if the debtor
recently paid down significant portions of the mortgage.
Where the home was purchased within 3 years and 4 months of filing
bankruptcy, and was purchased with the proceeds of the sale of
another home that was owned at the 3 year-4 month point, then the
new home is still protected to the extent of the value derived from
the proceeds of the sale of the old home.
Even if the home qualifies for protection under the 3 year-4 month
rule, debtors who are convicted of "any criminal act,
intentional tort, or willful or reckless misconduct that caused
serious physical injury or death to another individual in the
preceding 5 years" as part of their judgment would not have the
home protected if they file a bankruptcy. The new bankruptcy law allows creditors to be
able to use involuntary bankruptcy to eliminate homestead
protections from people who live in
buy expensive homes there to protect themselves from creditors. A
debtor forced into bankruptcy may be able to save his homestead if
his case is converted to Chapter 13 by virtue of “the means test”.
The means test apparently
applies only to voluntary Chapter 7 bankruptcy actions. Therefore, a
'means test' may not thwart creditors from using involuntary
petitions to force a Chapter 7 liquidation of homestead properties.
Tenants By The Entireties
Many states, such as Florida, exempt real property owned by husband
and wife as tenants by entireties from creditor claims where only
one spouse is a debtor. In those states, a married couple's house
will still be absolutely protected from the creditors of one spouse
if it is held as tenants by entireties between husband and wife. For
example, if a multi-million dollar judgment is placed against a
husband who owns a home as a tenant by the entirety with his wife,
then upon filing bankruptcy, there will be no limitation on
protection of the home because of the tenancy by the entireties
Tenancy by entireties is a common law rule of property ownership,
and bankruptcy law has traditionally deferred to state property law.
Many homeowners will continue to have their spouses own most or all
of the family investment assets, particularly where tenancy by the
entireties protection is not available.
"means test" imposed by the new law attempts to make all
families with incomes over the median state income for a household
of its size file Chapter 13. So anyone with an income above that
level should consider filing before October. A real oddity in the
law is that one's income is presumed to be the average of your
income for the last 6 months. So, that income figure for purposes of
the law may have no real relationship to the actual monthly income
Is the family earning above the average income for their state?
US average for a family of one = $18,762;
US average for a family of two = $39,343;
US average for a family of three = $47,115;
US average for a family of four = $53,165.
the answer is "No" Chapter 7 can be filed!
If the answer is "Yes" to TEST # 1 , do you have excess
monthly income of more than $166.66/month to pay $10,000 of debt
over 5 years?
the answer is "No" you must answer another question, if
"Yes" Chapter 7 cannot be filed but Chapter 13 may be
If the answer is "No" to TEST # 2 do you have excess
income of greater than $100/month to pay over the next 60 months at
least 25% of your unsecured debt?
the answer is "No" you can file Chapter 7, if
"Yes" chapter 7 cannot be filed but Chapter 13 may be
of How Much Money Debtors are "Able" to Put Towards Their
Credit Card Debts
of the means tests listed above involves how much a debtor can
afford to pay towards credit cards. How do you calculate this? The
formula is simple:
- Living Expenses = Money to be Applied Towards Debts
though the main formula is simple, how you calculate income and
living expenses are highly complicated.
filing Chapter 7 or Chapter 13 bankruptcy, must provide to the
trustee, at least seven days prior to the 341 meeting, a copy of a
tax return or transcript of a tax return, for the period for which
the return was most recently due. Big problems with this - As you
may not be aware, bankruptcy records are public. Do you want your
tax returns (part of your bankruptcy records) public?? With identity
theft rampant, your name, address and SSN will be front and center
to all ID thieves. What if all of the sudden you lose your job or
have a big drastic cut in pay? Your last year's tax returns may not
reflect your true earnings.
IRS Gets to Decide What Reasonable Living Expenses Are
the old law, the debtor stated what he though was reasonable and the
Trustee would object to anything that seemed unnecessary or
extravagant - then the Court would decide what was fair. Under the
new law, we will all be told what living expenses are reasonable
using IRS guidelines of what the IRS thinks is reasonable.
what about savings? Teaching people to be responsible with their
money involves saving for the future. The lack of such savings may
have put some of these people in the situation which forces them to
file bankruptcy. Does the IRS rulebook allow people to set money
aside for a rainy day?
credit card debts
credit card companies, especially the sub prime lenders and American
Express, are prone to contesting the dischargeability of credit card
debts in Chapter 7 when there are charges in the 3-6 months before
the filing or where the balance is particularly large, perhaps in
excess of $15,000 to $20,000. Often, if the nondischargeability case
were actually tried to a judge, the debtor would prevail. The cost
of such a trial however motivates debtors with valid defenses to
settle or to opt for Chapter 13, where almost all debts are
the new law, debts non dischargeable because of fraud will survive a
Chapter 13 discharge. Thus, individuals who suspect that they might
face a creditor challenge to dischargeability would be well advised
to file before the new law becomes effective. Also, a debtor whose debts are primarily business
debts may be exempt from the 'means test'.
new law is riddled with formulas, calculations, limitations, and
economic fictions. Attorneys fees for cases filed after October
inevitably will increase, probably substantially, to fund the legal
work necessitated by the changes. Repayment period of Chapter 13
will be almost twice as long. For those pushed to Chapter 13
bankruptcies, the repayment period is 5 years instead of 3 years.
there is security put in place within 3 years on your vehicle, you
must pay the full amount owed or lose the vehicle. Current
bankruptcy laws allow you to get the loan stripped down to the value
of the vehicle and you make payments at that rate.
does this mean to the consumer? Let's say you had poor credit and
could only afford to buy a car from that shady used car dealership
that sells cars to people with bad credit. Typically, the interest
on these cars are over 20%, which can make a loan for $2000 car
$16,000 if you added up all the payments made for the life of the
loan. Under the new laws, the consumer would be required to pay the
entire $16,000 back, or lose the car. The old laws reduced the
amount of the loan to what the car was worth, and payments would
continue from that point.
must have finished counseling within the last 6 months before you
can file. Critics say this requirement, in addition to adding costs,
ignores Senate investigations that suggest the counseling industry
is rife with excessive fees, pressure tactics and poor service.
Moreover, no approved list of counselors exists. The legislation
charges the U.S. Trustees office with creating such a list. And if
you've known me at all, you know how much I'm horrified at the
non-profit credit counseling industry.
The only people who could be debtors are those
individuals who attend a debt management course from an approved
provider. Debtors who want to avoid involuntary bankruptcy should
not take the approved course thereby disqualifying them from either
voluntary or involuntary bankruptcy. The proposed changes in the
official bankruptcy rules to adapt to the new bankruptcy law have
been submitted. The proposed rules state that following an order
approving a petition for involuntary bankruptcy the involuntary
debtor must file a certificate of attendance at a debt management
course. The rules state that a debtor can be ordered by the court to
attend debt management after he is adjudicated bankrupt as a result
of an involuntary petition. A voluntary debtor who does not attend
is subject to dismissal of his case. The rules do not specify
penalties for failure to attend debt management courses as a result
of an involuntary bankruptcy petition.
The courts may or may not find that the debt
management education requirement of the new law is a ‘monkey
wrench’ in regards to involuntary petitions. It appears that the
proposed new bankruptcy rules hold that mandatory debt management
courses are consistent with involuntary bankruptcy petitions.
Support and Alimony
debts would go from a priority of 7th to 1st. Bankruptcy Lawyers are
held accountable for supplying accurate information. Under the new
law, if information about a client's case is found to be inaccurate,
the bankruptcy attorney may be subject to various fees and fines.
What this means is that the lawyer can be fined if his client has
supplied the him with false information that the lawyer, having no
reason to think the information is incorrect, forwards to the court.
This doesn't cover information supplied by a lawyer which he knows
is false, obviously wrong and fines should be levied in such cases.
But this isn't what the law says. The law can be interpreted to say
a lawyer can be found liable if his client lies to him.
to 15% of your income can be given to charity. This is seen by some
as a loophole allowing people who may be just over the thresh hold
of having to file Chapter 13 to drop down low enough to file Chapter
new law leaves intact an increasingly popular loophole called asset
protection trusts. These trusts allow people to protect substantial
assets from creditors even after filing for bankruptcy. Setting up
these trusts can cost many thousands of dollars. Maintaining them
and paying an in-state trustee can cost thousands more. That usually
rules these trusts out for people of modest means, making them an
option mainly for the wealthy, but this is not always true.
1977, these trusts could only be opened offshore. But since then,
eight U.S. states -- Alaska, Delaware, Utah, Nevada, Rhode Island,
Oklahoma, South Dakota and Missouri -- have passed laws exempting
assets held in the United States from federal bankruptcy laws.
People opening one of these trusts don't have to be a resident of
the state, but merely establish the trust through a financial
institution located there.
of Homestead Exemption under New Code §522(o) and the Conversion
of Nonexempt into Exempt Property
In re Maronde, 332 B.R. 593
(Bankr. D. Minn. 2005), (N. Dreher), is a recent decision that
interprets and discusses new §522(o) of the Bankruptcy Abuse
Prevention and Consumer Protection Act (BAPCPA). The debtor, Kim
Morande, a resident of Minnesota, on the eve of filing a chapter
13 bankruptcy, and while insolvent, planned to take cash advances
on credit cards and then apply those funds to reduce his equity
line of credit against his homestead, and thereby increase his
exempt homestead. He planned to then sell a nonexempt truck and
trailer to raise cash to offer his new creditors settlements at
less than what he owed. Next, he took cash advances of $31,500 and
used the money to pay down his equity line of credit, thereby
increasing his exempt homestead property by that amount. He then
attempted to take an additional $22,300 in credit card advances to
further reduce his home mortgage debt, but those advances were
denied. When the last-mentioned attempt failed, Mr. Morande sold
his truck and trailer and applied $18,750 of the proceeds to
further reduce his home mortgage lien (to zero). He then filed a
chapter 13 bankruptcy petition.
Mr. Maronde unfortunately filed his
petition on April 20, 2005, the day the president signed the
BAPCPA. Therefore, his case was subject to 11 U.S.C.
§522(o), which became effective on that day. However, at
that time he was still able to seek an eventual discharge of the
unpaid balances of his credit card debts obtained by fraud, since
the addition of that exception to discharge under chapter 13 did
not become effective until Oct. 17, 2005.
The Minnesota homestead exemption is
limited to $200,000. The debtor claimed home equity of $69,572 as
exempt homestead property and proposed a plan that would pay
general unsecured creditors $13,678, less than half of what he
owed them. The trustee objected to the debtor’s claim of
homestead exemption based on §522(o), and also objected to
confirmation of the debtor’s chapter 13 plan.
Section 522(o) provides that “the
value of an interest in...property” the debtor “claims as a
homestead” shall be reduced to the extent that “such value is
attributable to” any property the debtor “disposed of” in
the 10-year period ending on the date of the filing of the
petition “with the intent to hinder, delay or defraud a creditor
and that the debtor could not exempt...if on such date the debtor
had held the property so disposed of.”
The court stated that the issue is
“whether the debtor acted with intent to hinder, delay or
defraud a creditor when he sold his truck and trailer and used the
proceeds to increase the equity in his homestead by $18,750.”
The court held that the debtor acted with the requisite intent,
and sustained the trustee’s objections. In explaining its
decision, The court stated that the words, “intent to hinder,
delay or defraud a creditor” contained in §522(o) should be
interpreted the same as in the fraudulent conveyance provisions
[§548] and the denial of discharge provisions [§727(a)(2)] of
the Code, as developed in the body of case law construing those
sections. This intent may be inferred from the presence of
several or more “badges of fraud.” There is no need to
prove all of them and there is no weighing system
applicable. The court then itemized 11 badges of fraud.
The court stated that in this case,
the inference of intent to hinder, delay and defraud creditors is
“inescapable” because (1) the debtor essentially transferred
property to himself (2) at a time when he was insolvent and (3)
the transfers constituted substantially all his nonexempt assets.
The court acknowledged that debtors are permitted to convert
nonexempt assets into exempt assets on the eve of bankruptcy, but
indicated that the conversion must not be done with intent to
defraud creditors, citing In re Holt, 894 F.2d 1005, 1008
(8th Cir. 1990). The court stated that although the
conversion of the debtor’s truck and trailer into exempt
homestead property, in and of itself, might not have been
objectionable, it became objectionable in this case because it was
“part and parcel” of his original scheme to defraud creditors,
to wit: to take cash advances on credit cards and apply the funds
to increase exempt equity in debtor’s homestead, to liquidate
the truck and trailer to raise cash to offer to creditors to
settle for less than he owed, and not to make an honest attempt to
pay creditors in full. The fact that this original scheme
did not work does not erase the original intent of the scheme.
Since the debtor’s conversion of
vehicles into homestead property was done with intent to hinder,
delay and defraud his creditors to the extent of $18,750, the
debtor’s homestead exemption was therefore denied to that
extent, and the trustee’s objection to claim of homestead
exemption sustained. Having denied the claim of the
homestead exemption, the debtor’s plan did not satisfy the
best-interests-of-creditors test and confirmation was
denied. This opinion raises some interesting questions.
The court’s comment that the debtor
“transferred assets to himself” was in the context of finding
the existence of a badge of fraud; however, neither a transfer of
property to oneself nor a conversion of property is listed among
the 11 badges of fraud mentioned in the opinion (or anywhere else,
for that matter). So is a transfer of assets to oneself, or
a conversion of nonexempt property into exempt property, a new
badge of fraud? Can a person actually transfer property to
himself? Could the transferor, who ends up owning the
equivalent of the property transferred and who has therefore not
altered his financial position, be said to have “disposed” of
What is the requisite intent of
§522(o)? There is only one reason to convert nonexempt
property into exempt property on the eve of bankruptcy – to
place it beyond the reach of creditors and enable the debtor to
keep it. Placing property beyond the reach of creditors
hinders and delays their collection efforts. Yet, as The
court indicated, conversion is permitted. Therefore, an
intent to hinder and delay creditors, which necessarily
accompanies such a conversion, cannot be a forbidden motive.
In fact, since conversion is legal and in the debtor’s best
interests, it arguably ought to be the intent of a competent
bankruptcy attorney preparing a client to file bankruptcy.
So what is the forbidden motive? Is it fraud?
Deception is universally regarded as an element of fraud. However,
no deception is involved in the conversion of assets, and the
conversion therefore could not have defrauded creditors. If
there was no fraudulent intent involved in the conversion, does
the conversion itself actually qualify as a ground for objection
to the debtor’s homestead exemption under §522(o)?
Speaking of fraud, the debtor in this
case clearly defrauded unsecured creditors by taking cash advances
of $31,500 and using the funds to pay down his home mortgage debt,
thus increasing his exempt homestead property by $31,500.
According to the opinion, this was actual fraud (perhaps criminal,
as well as tortious). Why then did these transactions not
result in a reduction of the debtor’s allowed homestead
exemption? If converting nonexempt vehicles and trailers
into exempt homestead property qualifies under §522(o), why would
converting nonexempt cash, obtained by fraud, into exempt
homestead property not qualify?
How should debtor’s counsel advise
his or her client insofar as pre-bankruptcy planning is
concerned? Should counsel advise clients that they should
not convert nonexempt assets into exempt assets? Not
according to this case. In view of the Maronde
rationale, perhaps good advice would be that although conversion
of nonexempt property into exempt homestead property is permitted,
the exemption may be denied or reduced if the debtor has engaged
in other fraudulent activity in anticipation of the bankruptcy
because, under those circumstances, The court may conclude that
the conversion was tainted by an overall scheme to defraud
Bankruptcy Reform: What the Courts Have Done So Far
The recent amendments to the
Bankruptcy Code via the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 (BAPCPA) have provided a number of
significant changes to the Code. This part examines how the
courts have been implementing the changes in the law.
The Lack of Clarity in Many
Provisions of BAPCPA
Many bankruptcy judges were
initially critical of BAPCPA primarily because they believed
Congress had not appeared interested in input from their
contemporaries regarding bankruptcy reform. Moreover, many
provisions of BAPCPA reduced the discretion of bankruptcy
judges. Now that BAPCPA has gone into effect, judges have been
getting down to the task of actually applying the law. The
problem, of course, is that numerous provisions of BAPCPA are
written in such a way as to invite different interpretations.
Many provisions of BAPCPA are confusing to say the least. In one
of the first cases interpreting BAPCPA, Chief Judge Robert A.
Mark in the Southern District of Florida observed:
After reading the several hundred
pages of text in the [new law], one conclusion is inescapable.
BAPCPA is not a model of clarity. In re Kaplan, 331
B.R. 483, 484 (Bankr. S.D. Fla. Oct. 6, 2005).
As a result of Congress’ lack of
clarity, courts likely will come to different interpretations of
various sections of BAPCPA. Two recent cases illustrate this
The New Limitation on the
As previously mentioned herein,
while most of the changes to the Code affect cases filed on and
after Oct. 17, 2005, certain changes actually became effective
for cases filed after the President signed BAPCPA in to law on
April 20, 2005. One of the changes effective on April 20 related
to the $125,000 cap on the homestead exemption contained in new
§§522(o), 522(p) and 522(q). Two of the first published
opinions involving BAPCPA looked at the sections related to the
homestead cap, but came to completely opposite conclusions. The
issue is whether the new $125,000 homestead equity cap is
applicable in states that prohibit a debtor from electing
federal exemptions (in other words, where a state has “opted
out” of the federal exemptions, a debtor does not have the
right to make this election, and must choose the exemptions
allowed in the state where the case is filed).
The that first case examining the
homestead issue, In re McNabb, 326 BR 785 (Bankr. D.
Ariz. 2005) Judge Randolph J. Haines found the language of
§§522(b) and 522(p) related to the homestead cap clear and
unambiguous. As a result of what he deemed the clear and
unambiguous language of the statute, Judge Haines found he could
not look to the legislative history or the “intent of Congress”
to interpret the language in the statute. While he noted the
result might seem curious, the court found it was bound by the
“clear and unambiguous” language of the statute. The court
held that the $125,000 cap on the homestead exemption was not
applicable in Arizona, and as a practical matter would be
applicable in only two states.
Judge Mark of Florida looked at the
same sections of the statute and came to the opposite conclusion
in In re Kaplan, 331 B.R. 483 (Bankr. S.D. Fla. 2005).
Judge Mark rejected Judge Haines’ strict analysis of the
statute in In re McNabb, finding that the language in
the statute contained sufficient ambiguity to allow him to
examine the intent of Congress. Judge Mark then noted that there
was no doubt that Congress intended BAPCPA to address the abuses
related to the so-called “mansion loophole,” where debtors
would move to states with an unlimited homestead exemption, such
as Florida, purchase a large house, and then file bankruptcy and
keep their house. Based on the ambiguity in the statute and
after looking at the clear intent of Congress, Judge Mark held
that the homestead exemption limitations imposed by BAPCPA
applied to most states, including Florida:
Looking to the legislative
history of the Reform Act, there is no doubt about what
Congress intended. Contrary to the assertion in McNabb
that the legislative history “is virtually useless as an aid
to understanding the language and intent,” the Reform Act is
replete with references demonstrating that the new homestead
limitations in §522(p) and (q) were intended to apply to all
states in which debtors could previously exempt amounts in
excess of $125,000.
Judge Mark’s analysis was adopted
by another Florida bankruptcy court, In re Wayrynen,
332 B.R. 479 (Bankr. S.D. Fla. 2005) (J. Friedman) and followed
by a court in Nevada. In re Virissimo, 332 B.R. 201
(Bankr. D. Nev. 2005) (J. Riegle).
Attorneys May Not Be a
BAPCPA appears to impose
significant new obligations on attorneys representing debtors.
These obligations are imposed on any entity defined as a “debt-relief
agency," which includes anyone who provides “bankruptcy
assistance” to an “assisted person." The conventional
wisdom has been that a debt-relief agency includes any attorney
representing a debtor. On the first day BAPCPA became effective,
however, one judge rejected this conventional view.
On Oct. 17, 2005, Judge Lamar W.
Davis Jr., Chief Bankruptcy Judge for the Southern District of
Georgia, entered an order declaring that attorneys are not
debt-relief agencies under new Code §§101(12A), 526, 527 and
528. See 332 B.R. 66 (Bankr. S.D. Ga. 2005).
Interestingly, the court’s order was not entered in a case,
but stated it would apply to all cases in Davis' court. Among
other reasons, Judge Davis observed that “it is hard to
imagine that the language which...conspicuously omits the word
‘attorney’ really requires an attorney to tell an assisted
person that he/she has the right to hire an attorney....” This
order is now on appeal. Judge Davis’ order has been criticized
by those who point out that, among other things, “bankruptcy
assistance” by a debt-relief agency includes “providing
legal representation,” which certainly should include
attorneys. Nevertheless, Judge Davis’ order points out that
the courts will play a large role in how BAPCPA is interpreted
Debtors Are Not Complying
with the BAPCPA Requirements
While much of the information is
anecdotal, in the few bankruptcy cases that have been filed
since Oct. 17, 2005, it appears that debtors have failed to
follow many of the BAPCPA requirements. For example, debtors
have failed to include the calculation of the means test, or
file a certificate of completing the required pre-petition
credit counseling. Many of the cases filed since Oct. 17 have
been dismissed by the courts as a result of these filing
deficiencies. In the Tampa Division of the Middle District of
Florida, for example, 89 of the 200 cases filed since Oct. 17
were dismissed. The majority of these cases were filed by pro
se debtors, who many people speculated would be most likely
to not follow the BAPCPA requirements. Of course, a case
dismissal now has more significant consequences for a debtor who
later re-files bankruptcy. In that event, the automatic stay may
either be limited to 30 days (in the event there was one prior
pending case dismissed within one year) or may never go into
effect at all (in the event two prior cases were dismissed that
were pending in the prior year).
Interestingly, the early published
cases under BAPCPA have shown that courts will not rewrite the
statute in order to give the debtor a “break” contrary to
the law. For example, in In re Gee, 332 B.R. 602
(Bankr. W.D. Mo. 2005), a case involving the new credit
counseling requirement, the debtor failed to obtain credit
counseling prior to filing bankruptcy. The debtor moved the
court to extend the time to obtain the credit counseling
certificate. Judge Dennis R. Dow found that the debtor had
failed to follow the specific requirements of BAPCPA in
requesting an extension of time, and dismissed the case:
Debtor requests that under the
circumstance of this case, and because of the need for an
immediate filing, the court waive the requirements contained
in paragraphs (1) through (3) of §109(h), including the
requirement of 109(h)(3)(A)(ii). The statute grants the court
the authority to postpone the credit counseling requirement,
but only if each of the stated conditions is satisfied. Debtor
is essentially asking the court to ignore one of the plainly
stated requirements for granting such a waiver. However, the
court cannot rewrite the statute and declines the debtor’s
invitation to do so.
Judge Dow’s reasoning position
was followed in In re Davenport, 2005 W.L. 3292700
(Bankr. M.D. Fla. Dec. 6, 2005) (J. May) (similar post-Oct. 17
cases cited in footnote 2).
In a case involving a debtor’s
request to extend the automatic stay, which had expired based on
the debtor’s prior case dismissal, the court would not extend
the stay without sufficient evidence and compliance with the
statute. Judge Isgur found that the court “is obliged to
implement Congress’ intent. Taken in context, Congress
intended to direct the court to conduct an early triage of
re-filed cases. Debtors whose cases are doomed to fail should
not get the benefit to an extended automatic stay.” In re
Charles, 332 B.R. 538 (Bankr. S.D. Tex. 2005).
Is Anything Really Going to
The McNabb and Kaplan
decisions illustrate how two judges can look at the same section
of BAPCPA and come up with completely different interpretations.
Bankruptcy judges will struggle to harmonize the language of the
statute with the intent of Congress. As Judge Mark mused in
Kaplan, “implementing the changes will present a daunting
challenge to judges, clerk's offices, attorneys and the parties
who seek relief in the bankruptcy court after Oct. 17, 2005....”
It is too soon to tell whether the
practice and results in consumer bankruptcy cases will change
significantly in light of BAPCPA. Many had speculated there
would be minimal real changes in practice, or at best, the
changes made by BAPCPA would be followed as an exception rather
than the rule. The first published cases under BAPCPA discussed
above, however, indicate that bankruptcy judges are ready to
view the statute narrowly and follow the pro-creditor
congressional intent expressed throughout BAPCPA – even where
the court may feel that the intent of Congress is flawed or
at Florida Homestead Services think this is the most despicable
bill to pass in Congress in a long while. It just shows that in
today's politics, money rules the show. Congress, the lawyers in
Washington, have sold out the American citizen for the love of
power and money. The credit card industry has spent untold
millions of dollars passed down to credit card holders in lobbying
fees and donations to Congressional "re-election" funds
for almost ten years to ensure the legislation would pass. The net
result? We have the finest lawyer led Congress your hard earned
money and credit can buy. State law should prevail though in
regards to the homestead asset protection exemption if you know
how to protect yourself and your property. The answer? Simply, do
not file bankruptcy. There are many issues pertaining to involuntary
bankruptcy which will have to clarified through judicial decisions
that will only come with time. Of course, the courts will not rule
in favor of 'Joe Citizen', we can almost guarantee that.
should also be noted that the new bankruptcy laws also leave in
important loophole which benefit only the wealthy...the homestead
provisions and the Asset Trusts. In February, 92 bankruptcy and
commercial law professors, saying they represented all major
political parties, wrote the Senate to decry the current
legislation as deeply flawed. They predicted that it would harm
small businesses, the elderly and families with children.
bankruptcy filing rate is the symptom. It is not the
disease," wrote the professors. While some people do abuse
bankruptcy, they argued that the bigger problem has been the way
credit is marketed to consumers extending debt, notably credit
cards, "to riskier and riskier borrowers" with the
predictable consequence that more consumers are going belly-up.
Read more here...You
can also read a great manuscript regarding homestead and
bankruptcy by Florida Supreme Court Justice Overton here.
you have been planning to file bankruptcy and you earn a
respectable living, you had until late October 2005 to do so
under the new law. The best thing in our opinion is to NOT file
federal bankruptcy and allow the state laws to protect your
assets. Please, protect your home and property today! Don't wait
until the last minute. Our experienced staff and attorneys at
Florida Homestead Services can help you protect the equity in
your home, and your home.
October 13, 2006 -- Lawyers: Bankruptcy Reform A Failure
Nearly a year into the federal government’s overhaul of the
nation’s bankruptcy laws, attorneys say the changes have done
more harm than good. In a survey
of 700 members of the National Association of Consumer
Bankruptcy Attorneys (NACBA), respondents state that bankruptcy
filings have increased since the law was adopted.
two thirds, 68.5%, say their bankruptcy filings were up in the
third quarter compared to the first half of the year. More than
half of the attorneys, 57.5%, expect filings to reach their
pre-reform levels by the time the one-year anniversary of the
measure arrived October 17. Attorneys
indicated that the bankruptcy law changes have made it harder
for consumers by increasing expenses and paperwork involved with
three quarters of bankruptcy attorneys say the time involved in
preparing a bankruptcy filing has gone up by 50% or more. An overwhelming majority of
respondents, 92.8%, say that bankruptcy reform has mostly
increased costs, compared to 0.7% who say it has mostly improved
other survey findings:
than a third of bankruptcy attorneys are seeing an increase in
forced Chapter 13 repayment filings, which is contrary to what
proponents of the changes projected.
than 60% of bankruptcy attorneys report a jump in consumer
inquiries about bankruptcy.
Attorneys indicate that the “vast majority” of bankruptcy
cases involve unforeseen expenses rather than wasteful spending.
Among the most common causes of bankruptcy filings, they say,
are medical expenses, unemployment, home-related debt and
increased credit card interest rates.
practice, the new bankruptcy law changes have proven to be a
nearly total bust in terms of what the proponents of the changes
forecast,” says NACBA Officer Ike Shulman, a bankruptcy
attorney in San Jose, Calif. “The only good news here is that
the law is so flawed and has been interpreted in such a way that
some of the dire consequences many of us feared fortunately have
not come to pass.”
Read more about how bankruptcy
affects homestead exemption