Creditors, Let’s Talk about Bankruptcy!

     Bankruptcy! This is not a topic that most creditors wish to discuss! However, with Judges still “reacting” to the economic downturn of the last few years, with bankruptcy filings on the rise, with the conversion of many Chapter 13 cases to Chapter 7, with the aggressive lawsuits filed by counsel for debtors for violations of consumer laws, with increasingly detrimental provisions in Chapter 13 plans, and, with the strict review of proofs of claim and the requirements for the same, we should talk! 

     In regard to proofs of claim, our local bankruptcy courts require that if you are alleging a security interest in the debtor’s principal residence, in addition to the proof of claim form, you must also file a completed form B 10 (Attachment A) setting out the principal due, interest due, late fees, returned check fees, attorney’s fees, escrow shortage, amount due to bring loan current, etc. In addition, each time the debtor becomes delinquent on their mortgage during the bankruptcy, you must file form B 10 (Supplement 2), setting out late charges and other expenses charged to the debt. In the event the debtor’s mortgage payment amount changes due to increase or decrease in interest rate, insurance premiums or real estate taxes, form B Supplement (1) will need to be filed. 

     Obviously, this is a more complex and detailed filing, and, certainly, will be closely scrutinized. While you can file your own proofs of claim, we can also do it for you. 

     Creditors must be very careful to fully redact ALL “identifying data” (this includes procedure codes and/or other identifying treatment references for healthcare providers) on court filings to help protect debtors’ vital information from identity theft. Failure to do so will result in a court award of sanctions and attorney’s fees. Several local bankruptcy attorneys are reviewing all proofs of claim in their cases to spot possible violations. I have already had clients who have filed their own proofs of claim and been sued for violations. This is a very expensive problem. 

     Accordingly, I am still offering a “flat rate” fee for filing your proofs of claim and ask that you consider taking advantage of the same. In the end, I think that this will be a less costly and better alternative for you. I will file your first proof of claim in a case for a charge of $250.00. Second and subsequent pleadings for the same case will be billed at one half hour, and one quarter hour respectively. 

     I invite you to please call me so that we can discuss your questions. 

Eddie

Bankruptcy: Fraudulent Real Estate Conveyances in a Chapter 7 Case

     In the case of Gold v. Laines, the United States Bankruptcy Court in Alexandria ruled that a Chapter 7 Trustee may recover two properties – the debtor’s home and a rental townhouse – as voluntary and fraudulent conveyances under Virginia law and federal bankruptcy law. The Court further denied the debtor a discharge for having fraudulently transferred the property within one year of the filing of his case. 

     The Court found as facts in Laines that the debtor bought his home and took title solely in his name. Fifteen weeks later, he married his wife, and three days later, he transferred his home to his wife and himself as tenants by the entirety with the common law right of survivorship by “Deed of Gift”. Two years later the debtor and his wife conveyed the home to the wife and a third party by deed of gift. As a result of this, husband and wife owned the home as joint tenants with the common law right of survivorship. 

     The townhouse was also solely owned by the debtor prior to his marriage. Soon after marriage he conveyed it to himself and his wife as tenants by the entirety. A little over a year later the debtor and his wife conveyed the townhouse to themselves and a different third party as tenants in common. This deed also was captioned “Deed of Gift.” The debtor filed for bankruptcy two years later. 

     The Court noted that by law the Bankruptcy Trustee could avoid the last transfer of the house and the last transfer of the townhouse if he proved his case that the transfers were fraudulent conveyances under the Virginia fraudulent conveyance statute, Va. Code Section 55-80. The Bankruptcy Trustee pointed to multiple badges of fraud. He argued that the transfers were to the debtor’s wife and himself as tenants by the entirety. The Debtor retained an interest in the transferred properties and possession of them. There was no consideration. They were made when his start-up venture, a telecommunications company, was heavily in debt, on a debt he had guaranteed. 

     The Court stated that the burden shifted to the wife to come forward and show that the transactions were bona fides and not merely contrivances to place the debtor’s property beyond the reach of creditors. She did not testify. The Court held that the debtor’s actions, in absence of satisfactory evidence of the bona fide nature of the transactions, reflected that the transactions were not undertaken for stated reasons, but were undertaken with the intent to hinder, delay or defraud his creditors. The Court found that neither of the third parties took the property in good faith. They had sufficient knowledge of the debtor’s circumstances and the unusual nature of the transactions to put a reasonable person on notice and cause them to inquire further. The Court held that the Bankruptcy Trustee could recover the house and the townhouse from the two third parties under Virginia Code Section 550 (a).

     The Court also found that the debtor’s intent to hinder, delay or defraud his creditors by the last conveyance of the home was clear. That intent was sufficient even though the transfer itself was not necessary to protect the asset from his creditors.

     The tenants by the entireties transfers of the house and the townhouse were avoided under Virginia Code Section 55-80, as implemented by Bankruptcy Code Section 544(b), and both properties were recoverable by the Bankruptcy Trustee. The debtor was also denied a discharge under Bankruptcy Code Section 727(a)(2) as a result of his last fraudulent transfer of the home.

Creditors, let's talk about bankruptcy.

     Bankruptcy! This is not a topic that most creditors wish to discuss! However, with Judges still “reacting” to the economic downturn of the last few years, with bankruptcy filings on the rise, with the conversion of many Chapter 13 cases to Chapter 7, with the aggressive lawsuits filed by counsel for debtors for violations of consumer laws, with increasingly detrimental provisions in Chapter 13 plans, and, with the strict review of proofs of claim and the requirements for the same, we should talk! 

     In regard to proofs of claim, our local bankruptcy courts require that if you are alleging a security interest in the debtor’s principal residence, in addition to the proof of claim form, you must also file a completed form B 10 (Attachment A) setting out the principal due, interest due, late fees, returned check fees, attorney’s fees, escrow shortage, amount due to bring loan current, etc. In addition, each time the debtor becomes delinquent on their mortgage during the bankruptcy, you must file form B 10 (Supplement 2), setting out late charges and other expenses charged to the debt. In the event the debtor’s mortgage payment amount changes due to increase or decrease in interest rate, insurance premiums or real estate taxes, form B Supplement (1) will need to be filed. 

     Obviously, this is a more complex and detailed filing, and, certainly, will be closely scrutinized. While you can file your own proofs of claim, we can also do it for you. 

     Creditors must be very careful to fully redact ALL “identifying data” (this includes procedure codes and/or other identifying treatment references for healthcare providers) on court filings to help protect debtors’ vital information from identity theft. Failure to do so will result in a court award of sanctions and attorney’s fees. Several local bankruptcy attorneys are reviewing all proofs of claim in their cases to spot possible violations. I have already had clients who have filed their own proofs of claim and been sued for violations. This is a very expensive problem. 

     Accordingly, I am still offering a “flat rate” fee for filing your proofs of claim and ask that you consider taking advantage of the same. In the end, I think that this will be a less costly and better alternative for you. I will file your first proof of claim in a case for a charge of $250.00. Second and subsequent pleadings for the same case will be billed at one half hour, and one quarter hour respectively. 

     I invite you to please call me so that we can discuss your questions. 

Eddie

Bankruptcy: Lien Avoidance - Homestead Exemption in Chapter 7

     In the case of In Re Saeed, the United States Bankruptcy Court in Norfolk, Virginia ruled that the bankruptcy debtors were not entitled to avoid a judgment lien of a distributing company on their Chesapeake, Virginia residence, which the debtors asserted (on motion made two years after the closing of the case, even though the debtors had knowledge of the lien while the case was open) was titled solely in the debtor husband’s name and was actually worth less than the debt owned on the property. 

     In Saeed the debtors contended that the judgment lien impaired the debtor husband’s claimed exemption in the property. The creditor argued that the doctrine of laches should bar the debtors’ motion and that the judgment lien did not impair the homestead exemption. The court found as fact that the debtors were aware of the lien before they filed their bankruptcy petition. The debtors did not move to avoid the lien while the case was open, and the only excuse that the debtors’ offered for the delay in bringing their motion to avoid the lien was that they had been unable to refinance the property because of the lien. The court stated that because the debtors failed to offer any extenuating circumstances that would justify an almost two year delay in bringing their motion to avoid the lien, the delay was not excusable. The creditor alleged that the delay would cause it to face the additional expense and difficulty of attempting to appraise the value of the property as of the petition date two years prior. The court ruled that because the debtors’ delay was inexcusable and the creditor was prejudiced, the creditor met its burden of proving the doctrine of laches. 

     The court stated that a debtor seeking to amend its schedules after its case is closed bears the burden of establishing that the failure to amend the schedules before the case closed was the result of excusable neglect, and, that cause exists to amend the schedules. The court found that the debtors in Saeed failed to prove that the original schedules were entered by mistake, inadvertence, or excusable neglect. The court found as fact that the debtors offered no plausible explanation at all. In addition, the court found that the creditor suffered prejudice because it relied on debtors’ original schedules when determining how to proceed with respect to their judgment lien during the bankruptcy proceeding. The court found that the amended schedules would eliminate the debtors’ equity cushion in the property, and, therefore, eliminate the judgment lien. The court found that for the debtors to delay almost two years from the close of their case to amend their schedules, and to do so without mistake or excusable neglect, would cause the creditor to suffer undue prejudice.

     The court stated that although Bankruptcy Code Section 522(f) provides that a court may avoid a judgment lien to the extent that the lien impairs the equity the debtor has exempted in the property, the court need not even reach the issue of whether the judgment lien impaired the debtor’s claimed exemption and may be avoided. The court noted that under the original bankruptcy schedules the debtors claimed the property as tenancy by the entirety. The creditor’s judgment lien was against husband only and could not attach to entireties property. In their amended schedules the debtors claimed that the property was owned by husband, not tenants by the entireties. Thus, the judgment lien would attach to the property, the lien would impair the claimed exemption, and the lien could be avoided. The court stated that because the debtors offered no plausible explanation for the need to change their schedules and, because of the prejudice to the creditor in relying to its detriment on the original schedules as filed by the debtors, the court denied the debtors’ motion to avoid the lien.

Creditors, Let’s Talk about Bankruptcy!

     Bankruptcy! This is not a topic that most creditors wish to discuss! However, with Judges still “reacting” to the economic downturn of the last few years, with bankruptcy filings on the rise, with the conversion of many Chapter 13 cases to Chapter 7, with the aggressive lawsuits filed by counsel for debtors for violations of consumer laws, with increasingly detrimental provisions in Chapter 13 plans, and, with the strict review of proofs of claim and the requirements for the same, we should talk!

     In regard to proofs of claim, our local bankruptcy courts require that if you are alleging a security interest in the debtor’s principal residence, in addition to the proof of claim form, you must also file a completed form B 10 (Attachment A) setting out the principal due, interest due, late fees, returned check fees, attorney’s fees, escrow shortage, amount due to bring loan current, etc. In addition, each time the debtor becomes delinquent on their mortgage during the bankruptcy, you must file form B 10 (Supplement 2), setting out late charges and other expenses charged to the debt. In the event the debtor’s mortgage payment amount changes due to increase or decrease in interest rate, insurance premiums or real estate taxes, form B Supplement (1) will need to be filed.
     Obviously, this is a more complex and detailed filing, and, certainly, will be closely scrutinized. While you can file your own proofs of claim, we can also do it for you.
     Creditors must be very careful to fully redact ALL “identifying data” (this includes procedure codes and/or other identifying treatment references for healthcare providers) on court filings to help protect debtors’ vital information from identity theft. Failure to do so will result in a court award of sanctions and attorney’s fees. Several local bankruptcy attorneys are reviewing all proofs of claim in their cases to spot possible violations. I have already had clients who have filed their own proofs of claim and been sued for violations. This is a very expensive problem.
     Accordingly, I am still offering a “flat rate” fee for filing your proofs of claim and ask that you consider taking advantage of the same. In the end, I think that this will be a less costly and better alternative for you. I will file your first proof of claim in a case for a charge of $250.00. Second and subsequent pleadings for the same case will be billed at one half hour, and one quarter hour respectively.
     I invite you to please call me so that we can discuss your questions.

Eddie

Bankruptcy: IRA Exemption in Chapter 7

     The United States Bankruptcy Court in Alexandria, in the case of In Re Hasse, ruled that a federal employee who participated in the federal thrift savings plan may claim an unlimited exemption in an individual retirement account, despite the objection of the Chapter 7 trustee.

     The IRA, valued at $100,000, was claimed exempt under Virginia Code §34-34. Virtually all the debtor’s other assets were either encumbered by liens or were exempt, with the result that the IRA was the only asset potentially available for the payment of creditor claims. At issue in this case was the Virginia General Assembly’s decision to amend Virginia Code §34-34 in 1999 by adding subsection H, which provided that an individual who claimed an exemption under federal law for any retirement plan established pursuant to §§ 401, 403(a), 403(b), 409 or 457 of the Internet Revenue Code (“IRC”) shall not be entitled to claim the exemption under this subsection for a retirement plan established pursuant to §408 or §408 A of the IRC. The thrust of the amendment was to give a debtor who had no other tax-qualified retirement plan the right to an unlimited IRA exemption but to deny the unlimited exemption to a person who was covered by such a plan. By giving a person who was not covered by an ERISA-qualified plan the right to an unlimited IRA exemption, such a person would be put on an equal footing with an employee who was a participant in an ERISA-qualified plan.
     The Bankruptcy Court found that a federal thrift savings plan account, while it is similar to, and for tax purposes is treated exactly like a private employer 401(k) plan - was nevertheless not subject to all the regulations governing §401(k) plans. The question was therefore whether, for the purpose of applying §34-34(H), a thrift savings plan account should be treated as a “retirement plan established pursuant to” §401 of the IRC. If so, the debtor was not entitled to a further exemption for his IRA; otherwise, he could exempt it in full.  
     The trustee took the position that Congress, by treating the thrift savings plan for tax purposes in the same fashion as 401(k) plans, sufficiently equated the two for the purposes of applying Virginia Code §34-34(H). Debtor took strenuous exception to that argument and points out that 5 U.S.C. §8440 only governed the tax treatment of thrift savings plan contributions and distributions. The Bankruptcy Court noted that not only did the enabling statute mandate compliance with the “requirements” of §401(k), it expressly exempted it from compliance with two of those requirements.
     The Bankruptcy Court found that the trustee’s argument ignored the words chosen by the Virginia General Assembly. Those words were very precise. The Bankruptcy Court ruled that a debtor was entitled to an unlimited exemption in an IRA unless the debtor was a participant in, or beneficiary of, a plan that is “intended to satisfy the requirements of” and is “established pursuant to” certain specific sections of the IRC. Although the thrift savings plan operates like, and enjoys the tax benefits of, a 401(k) plan, it was not a 401(k) plan and was not subject to all the “requirements” of a 401(k) plan. The Bankruptcy Court stated that for whatever reason, the General Assembly chose not to define “retirement plan” in such a way as to embrace, not only plans “established” under the enumerated sections of the IRC, but also plans treated for tax purposes like such plans.
     Prior the enactment of Virginia Code §34-34(H), only a limited exemption was available in Virginia for IRAs. The Bankruptcy Court found that the statute plainly intended to expand that exemption. The ability of people to provide adequately for their old age is obviously a matter of great public importance, and it is certainly reasonable that the General Assembly would want, as a matter of sound public policy, to protect savings set aside for that purpose.
     Accordingly, the trustee’s objection was overruled and the debtor’s exemption was allowed.

Bankruptcy: Dischargeability of Debt - False Financial Statement in Chapter 7 Case

     Judge Tice, United States Bankruptcy Court in Richmond, denied discharge of a debt in a Chapter 7 case. The case was Global Express Money Orders, Inc. v. Davis. In Davis, the debtor previously had a convenience store that sold the creditor’s money orders through the store. The debtor still owed the creditor ($71,168.55) for some of these money orders. At issue was the debtor’s financial statement provided to the creditor at the commencement of the business between them. 

     The Court found that the debtor’s financial statement was materially false. In fact, at trial the debtor did not seriously question the inaccuracy of the statement. Rather, he tried to distance himself from its preparation and delivery to the creditor. In the financial statement the debtor provided false information as to cash in a checking account, the value of his personal residence and a beach condominium, the value of his equity in certain investments, value of mutual funds and an expected federal tax refund.
     The Court further found that the creditor required the personal financial statement of debtors as a condition precedent of the business arrangement; that the debtor, with intent to deceive, published the materially false financial statement and caused it to be delivered to the creditor; and that in contracting with the creditor and allowing the entity to incur substantial indebtedness, the creditor reasonably relied upon materially false asset entries in the financial statement, which debt was indemnified by the debtor personally.
     The Court rejected the debtor’s argument that the creditor failed to prove that he prepared the financial statement and authorized its delivery, i.e., publication with intent to deceive, to the creditor. The Court determined that the evidence showed that in the debtor’s presence and with his knowledge, the financial statement was delivered to the creditor by an (unknown) employee of the debtor’s business. The Court ruled that this evidence was sufficient to require some better explanation from the debtor than he provided. The Court stated that it did not believe the debtor’s evasive testimony that he was too busy to be bothered, and knew nothing about the contents of the financial statement or the circumstances surrounding its delivery to the creditor. The Court determined that at the very least, the debtor recklessly allowed his financial statement to be used by the creditor for its consideration of the business transaction, and his reckless indifference was sufficient to satisfy the publication with intent to deceive element of Bankruptcy Code §523(a)(2)(B).
     As to damages, the debtor argued that the loss of payment of the trust balance due was not damage or loss resulting from his publication of the false financial statement, as required by the statute. Rather, the debtor stated that the loss resulted from the failure of store employees to separate money order sales. Moreover, according to the debtor, his stores were not generating enough revenue to pay the current liabilities, and there was no evidence that he personally took funds or caused the shortage. However, the Court found it ironic that the debtor could argue that it was his employees who failed to comply with the trust agreement requirement for segregating trust fund receipts of the creditor. The debtor agreed to indemnify the creditor for his business’s indebtedness under the trust agreement, and his inability to make good on the indemnity was a direct result of his financial problems and ensuing bankruptcy. Although the Court stated that causation was not a necessary or proper element of the false financial statement issue, the Court simply found that the debtor’s false financial statement was a proximate cause of the loss.

Bankruptcy: Chapter 7 Petition - Substantial Abuse

     The United States Bankruptcy Court at Harrisonburg, Virginia, in the case of In Re: Rodriguez, dismissed a debtor’s Chapter 7 petition for “substantial abuse” pursuant to Bankruptcy Code §707(b) where the debtor’s voluntary monthly contribution of $286 to his 401(k), as well as his post-petition purchase of a Ford pickup truck, clearly indicated that the had the ability to fully fund a Chapter 13 plan without incurring undue hardship.
     The Bankruptcy Court found that the debtors’ post-petition purchase of the new truck resulted in a net increase in monthly transportation-related expenses of $220. This voluntary increase indicated that the debtor felt that he had the ability to pay at least that amount to his creditors. The increase in transportation-related expenses and the contribution to the 401(k) alone total over $500 per month that the debtor could have used to pay his creditors. In doing so, the debtor could have paid his creditors 100 percent in less than 10 months. Conversely, if the debtor remained in Chapter 7, the majority of his creditors would receive nothing.
     The debtor’s Schedule I indicated that he enjoyed steady employment with the same employer for eight years, and expected to earn $38,000 in that current year. Nothing in the other schedules filed with the debtor’s petition indicated a sudden illness or calamity which might have necessitated filing for Chapter 7 protection.
     The Bankruptcy Court found that the debtor’s post-petition truck purchase, made with the knowledge that a short-term 100 percent Chapter 13 plan was feasible, constituted the kind of egregious abuse that Bankruptcy Code §707(b) was intended to prevent.
     The lesson of Rodriguez - review Chapter 7 schedules for the ability to pay.

Bankruptcy: Bankruptcy Filings: Chapter 7 and 13

     Although there are other Chapters under which debtors may seek relief, Chapters 7 and 13 are the most frequently encountered.
Chapter 7

     Chapter 7 involves a discharge of debt by court order. While secured debts may be routinely "reaffirmed", unsecured debts normally are not. Traditionally, debts have been reaffirmed through a Reaffirmation Agreement. The Courts of the Eastern District of Virginia have held, however, that creditors cannot force debtors to execute reaffirmation agreements if they were not in default at the time of the bankruptcy filing.
     Why would a debtor want to pay a debt when he has filed for Chapter 7 relief? The answer is future credit. The possibility of future credit can be sufficient incentive to encourage voluntary repayment for at least two (2) reasons:
     1. Debtors want and need future credit after bankruptcy discharge, and

     2. Reasonable credit after bankruptcy is very difficult to obtain as bankruptcy carries a stigma. Absent special circumstances, the only credit card a debtor may obtain after bankruptcy is a "secured" credit card. These cards are tantamount to a line of credit drawn upon account deposits pledged as security. There are also user fees and high interest rates.
     How do you encourage debtors to voluntarily pay their pre-bankruptcy petition debts? Consider adopting the following written policies:
     1. Post-bankruptcy credit may be extended to debtors who voluntarily pay their dischargeable debts ("the carrot").
     2. No future credit or services, other than those required by law, will be extended to debtors who have caused you a loss by bankruptcy or otherwise, unless the debt is voluntarily repaid (“the stick").
     How do creditors inform their debtors of this policy once a petition of bankruptcy is filed? Consider sending a letter directly to the debtors’ counsel asking that counsel advise their client of the policy.

Chapter 13
     Chapter 13 involves a "reorganization" of the debtor's finances. The debtor is required to devise a plan for repayment: 100% for secured debts and a court-approved percentage for unsecured debts. Creditors are paid in the order of priority - preferred (taxes), secured, and finally, unsecured. Creditors are required to file proofs of claim with the Bankruptcy Court to protect their place in the plan. Plans can take up to five (5) years to complete.

Co-Makers
     When can you proceed against co-makers? In Chapter 7 you can proceed immediately. In Chapter 13, you have to either wait until the plan pays out, or petition the Bankruptcy Court to lift the automatic stay against the co-maker. Once this is granted you can proceed against the co-maker for the percentage not paid by the plan. Although you are required to file the motion to lift the stay, the court is required to grant your relief.

Planning Summary
     Regardless of the Chapter, the best way to minimize your bankruptcy loss is to be secured. In Chapter 13 cases, security can mean the difference between payment at 100% rather than at a nominal percentage. In Chapter 7 cases, security can mean the difference between reaffirmation or no payment at all. In either Chapter, collateral is the key.
     The second best protection from bankruptcy loss is having a solvent co-signer. The old saying "two heads are better than one" can mean much in bankruptcy, especially when your co-signer is not a spouse. Generally, spouses do not make good co-signers because they can file a joint petition for bankruptcy and, in fact, often do because family finances are inter-related. It should be noted, however, that in a case of jointly owned real estate, a spouse's signature is necessary in order to perfect a lien against any real property.

 

Bankruptcy: What can we do for you

     Creditors need to know that having aggressive representation in bankruptcy cases is just as important as having a good plan.  We can help.  We have aggressive counsel and trained support staff.  We would be pleased to meet with you to review your representation needs.  Our work can be done on a flat fee basis, an hourly fee basis, or pursuant to a retainer agreement.

     In Chapter 7 cases, even in supposedly "no asset" cases, there are concerns about security interests, homestead deeds, fraud and abuse, and reaffirmation agreements.  Our "second opinion" and review of your cases could result in new hope for otherwise hopeless cases.

     In Chapter 13 cases there are concerns about amount of assets, manner of funding, percentage payments for unsecured debts and allowable expenses.  Do not assume that the debtor's first plan is set in stone - let us assert your interest.