On Tuesday, Gary Busey filed Chapter 7 bankruptcy.  That’s not all that shocking–plenty of celebrities have sought bankruptcy protection.  Entertainers like Gary Coleman, Burt Reynolds and Jerry Lee Lewis, businessmen like P.T. Barnum and Donald Trump, socialites like Patricia Kluge, professional athletes like Lenny Dykstra and Lawrence Taylor.  Even Abraham Lincoln and Walt Disney filed bankruptcy.  Their reasons for filing bankruptcy, like those of ordinary non-celebrity folks, run the gamut:  bad investments, bad economies, getting swindled, or getting sick.  It can happen to anyone, if the wrong thing happens at the wrong time.

What was a little shocking to me about Gary Busey’s filing was that his bankruptcy petition reports less than $50,000 in assets.  Busey’s manager issued a statement calling the filing the final chapter in a process of “jettisoning the litter of past unfortunate choices, associations, events and circumstances….”  I’m guessing it was a long process, if all that’s left of a fairly lucrative career is $50k, but that’s fairly typical, too.  Most people wait until they have jettisoned their assets and savings, along with their unfortunate choices, before filing bankruptcy.  It kind of goes with the territory.  By the way, read the whole statement by Busey’s manager.  It’s priceless, and I wish I could hire this guy to write a statement explaining the circumstances of all my clients’ bankruptcies.  With this guy on your side, you couldn’t help but believe you were on your way to better things.

And that brings me to the real point of writing about another celebrity bankruptcy.  Celebrities, and regular people, use bankruptcy to get their lives and businesses back on track.  To make a fresh start.  To move on to more stable and productive lives.  That’s the lesson, folks.  If you’ve been slammed by a bad economy or an illness, or victimized by a swindler, or if you just need to jettison the litter of unfortunate choices and associations, and start over fresh, bankruptcy may help you, too.

When a creditor obtains a court judgment against a debtor, wage garnishment can be soon to follow.  Most persons subjected to wage garnishment will consult a lawyer to see if it can be stopped, and many of those will file either chapter 7 or chapter 13 bankruptcy to stop the wage garnishment.  While stopping a garnishment through an immediate bankruptcy filing is often a good idea, care must be taken to avoid filing bankruptcy too soon.

This might sound a bit strange — after all, if one’s wages are being garnished, and if filing bankruptcy will put an end to this hemorrhage of dollars into the creditor’s pocket, shouldn’t the bankruptcy lawyer be asked to sprint to the courthouse with the bankruptcy petition?  Wouldn’t a speedy bankruptcy filing bring the paycheck right back to where it should be?  Yes, but often there more to this question than meets the eye.

Section 522(h) and section 547 of the bankruptcy law allows a debtor to recover money involuntarily taken from him or her in the ninety days preceding the bankruptcy filing.  These sections apply to wage garnishment, and they are often used to recover money garnished before a bankruptcy filing.  Of course, this results in a happy bankruptcy debtor, who has just discovered that he or she actually made money, in a sense, by filing bankruptcy and the recovering the garnished funds.

However, there is a catch: section 522(h) and section 547 can only be used in this way if $600.00 or more was garnished before the bankruptcy filing.  To put it another way, if $600.00 or more was garnished before the bankruptcy was filed, then all the funds can be recovered by the debtor; if less than $600.00 was garnished before the bankruptcy was filed, then the creditor gets to keep the money.

As you can now see, this is where the bankruptcy debtor needs to get the timing right.  It might be a mistake to file the bankruptcy right now if, for example, $550.00 has been garnished from the paycheck, because then the debtor will be unable to the money back.  Often, in this example, if the debtor can stand to wait until one more paycheck is garnished, then the total garnished before bankruptcy can be manipulated legally into a figure exceeding $600.00.  This will often allow the debtor to recover every penny of the garnished funds.

The possibility of recovering garnished funds will mean that a decision has to be reached between the debtor and the bankruptcy lawyer regarding exactly when to file the bankruptcy case.  Filing the case too soon would be a shame, if less than $600.00 has been garnished and if waiting a short time would enable the debtor to recover the money.

Furthermore, the strategy discussed here makes sense only if the debtor can claim the recovered funds as exempt in the bankruptcy.  If no exemptions are available to allow the debtor to retain the funds, then waiting to file the bankruptcy is probably a bad idea and will result only in further suffering for the debtor.  And, of course, if more than $600.00 has already been garnished, then waiting to file bankruptcy will not help the debtor either.

The point is simply this: discuss the timing of the bankruptcy filing with your lawyer to avoid filing the case too soon to meet the $600.00 threshhold, and avoid missing the chance to recover the wage garnishment.

Bankruptcy trustees in California and elsewhere were notorious for holding a Chapter 7 case open while real estate prices rose (hah!  remember those days?) above the protected values.  The trustee would then sell the home, forcing a debtor to move – and spend the protected part of the sale proceeds to do so -  while recovering money for the creditors.

In other situations, a debtor might own a “remainder” interest in an elderly parent’s home.  The elderly parent had deeded the home to the debtor but reserved a “life estate”, the right to possess while the parent lived.  The trustee would hold the case open until the parent died.  The value of the remainder interest would increase above the protected value, and the trustee would then sell the home.

The vast majority of cases ruled that the increase in value of a Chapter 7 asset belonged to the trustee, while the debtor was stuck with the fixed exemption amount.  Those courts have ruled that a frustrated debtor’s remedy was to move to compel the trustee to abandon the asset.   A trustee cannot keep a case open indefinitely.  The trustee must close the case expeditiously, after due consideration of the possibility of recovering money for the creditors.  How long is “expeditiously” in these circumstances is up to a judge’s discretion.  Unfortunately, that motion to compel has a $176.00 filing fee.

An analysis of compelling the abandonment will include the anticipated delay before the trustee sells the property.  In the life estate context, the life expectancy of the elderly parent is important.  It will also include a calculation of the anticipated dividend to the creditors after the parent dies.  Finally, the court will balance the competing policies of repayment to creditors against the need for an expeditious, just, speedy, and inexpensive determination and closing of the case and the violence done to the debtor’s fresh start and claims of exemptions.  See In re Saunders, 2011 Bankr. LEXIS 520 (Bankr. M.D. GA Feb. 17, 2011).

Oddly, in Massachusetts and elsewhere an increase in value of a Chapter 13 asset does not belong to the estate if it is not realized through a sale or refinance.  This appears to contradict the Chapter 7 rulings that postpetition appreciation belongs to the estate.

There is also a developing split of cases about whether a debtor can protect post-filing appreciation by having claimed “100% of fair market value” when the case was first filed.  This can be another helpful argument, if the appropriate exemption was claimed.

Image Credit:  USA

Getting compensated for injuries is personal.  It’s meant to replace a loss to you as a person.  Missouri exemption law recognizes that.  Yet the recent evolution of those exemptions in bankruptcy (here, here, and here) has set up an unusual conflict between state and federal law.

Until the Benn decision discussed previously, Missouri cases were uniform in saying that Missouri law protected an unliquidated personal injury claim from creditors — and from bankruptcy trustees.

In the modern era, the cases trace back to Judge Barry Schermer’s In re Mitchell decision in 1987.  Mitchell reasoned that the state never allowed trafficking in the injury claims of individuals under its common law.  And by implication, the “opt out” law (noted in part I of this series) incorporated the common law of Missouri into the arsenal of bankruptcy exemptions.

But in the Mahony case, Judge Arthur Federman found this long history was not sufficient to withstand the implications of the 8th Circuit’s Benn.  He reasoned that Benn commanded that a separate legislative act — a statute — was required for the state to provide a protection of any asset in bankruptcy.  So the common law — being created by the decision of a judge — was not enough to qualify.

Mahony is remarkable since most personal injury claims are common law (e.g. auto accidents are based on negligence) “created” by judges.  So while Missouri judges can create a cause of action, under Mahony the protection of that personal compensation from creditors afforded by those judges throughout our history turns out to be irrelevant, if you file bankruptcy.

Ironically of course  Western legal tradition holds that decisions of judges carry the force of law — unless the legislature itself acts to abrogate or reverse the decisions of the judges.  And this is true for Missouri as well.

One can search in vain through the Bankruptcy Code to find the authority for federal courts to dictate to state lawmakers what is a “law.”   Section 522 allows states to “opt out” of federal exemptions and enact their own but it does not tell the states how to do so.  Such requirements appear to be grafted into the Code.  Not by Congress but by federal… common law.

Despite all the fallout, common law exemptions or “magic words” of enactment were not at the heart of the Benn decision.  These elements appear more speculative than decisive — as witnessed by Benn‘s dictum apparently striking down of the state wildcard exemptions — including the idea that the legislature “might” have intended to create two different exemption schemes for debtors in or outside bankruptcy proceedings.  As lawyers say, it’s more dicta than holding.

Recently the Missouri state court of appeals was given the opportunity to express its opinion on the subject.  In Russell v. Healthmont of Missouri, a debtor asked the state court to declare his right to exempt a PI claim when he filed bankruptcy.  The court reiterated some of the cases finding we have always protected such claims and then confronted the Benn and Mahony decisions.  It pointed out, “Of course, federal cases interpreting Missouri law are not binding on this court interpreting our own statute.” (internal quotes omitted) The Russell panel went on to hold:

Under Missouri law, an unliquidated, personal injury claim can, if the proper procedures are followed and conditions satisfied, be exempted from his bankruptcy estate pursuant to Sec. 513.427 [the opt out law].  the trial court erred in relying upon federal cases interpreting a Missouri statute in a manner contrary to that of established Missouri case law…(slip opinion p. 6)

So eventually it will have to come to this.  It seems clear that state courts, interpreting their own law, do not believe a specific legislative act, much less any “magic words,” are needed to create an exemption for Missourians in bankruptcy.  And they seem to believe that “common law” is still “the law of the state of Missouri” and can qualify as an exemption.

But state judges do not rule in federal court buildings.  So will federal courts graft onto Sec. 522 a narrow linguistic and enactment standard that has not heretofore been found in it, particularly when it restricts the ability of states to craft their own exemption rules for their bankruptcy debtors?  Or will they find a more balanced approach that sustains the core (reasonable) holding of Benn while restoring the authority of Missouri courts to define what Missouri law is?  Time will tell.

Photo credit: Stig Nygaard

Cheaper to file bankruptcy

Sometimes it makes more sense to let go of the past and start building a new future.  Chapter 7 bankruptcy can be your solution.

Does this debt arrangement conversation sound familiar?

Client: I want to make arrangements to pay this debt.

Me: Ok, how much can you offer to pay?

Client: Nothing, I don’t have any money?

Is it any wonder the bank will not work with you?  Be realistic, creditors want cold hard cash, not talk, not arrangements.  If you cannot make a payment, your arrangement, while well intentioned, is nothing more than an empty promise.  It is time to check into reality.

Look, if you owe more money today than you did yesterday and you cannot pay your bills on time, you need to realize you are going in the wrong direction with your finances.  You incur debt by spending money you do not have.  If you do not have enough money to pay that debt you have to find another way to deal with it.

Money in, money out.  If your income is insufficient to cover your debts you either need more income or less debt, or both.  Bankruptcy won’t help you make more money but it can discharge some types of debt.  File that Chapter 7 bankruptcy, wipe out that debt, then you can use your money for the things you need, for you and your family and your future.

You might find it helpful to make a list of the items you can live without, and pare them from your budget.  Then you can concentrate on a lifestyle you can afford.  By taking a hard look at your expenses you can determine where your money goes and you can eliminate leakage – money that you spend on impulse or frivolous items.  Shake off the past and live for the future.  Life without debt is a goal you can achieve through Chapter 7 bankruptcy.

I frequently meet with clients who own a business that has financial problems. It may not be able to pay its bills as they come due, there may be an eviction threatened, or a lawsuit. These clients have done some homework, and usually start out our meeting by saying that they want to retain me to file Chapter 7 bankruptcy for their corporation or LLC.

They are also surprised when I tell them that for most businesses, Chapter 7 makes absolutely no sense.

Why?

Chapter 7 is the type of bankruptcy that most people think of when they think of bankruptcy. For individuals, it results in the discharge of general unsecured debts, such as credit cards and trade debt. It allows for the discharge of some older taxes. So why wouldn’t it make sense for a business in financial difficulty to file?

The answer lies in Section 727(a)(1) of the Bankruptcy Code. This section, which deals with Chapter 7 discharges, says: “The court shall grant the debtor a discharge, unless the debtor is not an individual.” Since corporations and LLCs are not individuals, they cannot receive a Chapter 7 discharge.

This means that, although a corporation or LLC can file for Chapter 7, it cannot receive a discharge. So why would it even think about filing for Chapter 7? That is the subject of an earlier blog I wrote on this topic.

Your bankruptcy filing can stir deep emotions.  More than a few times, I have received calls from individual (as opposed to corporate) creditors who, after receiving a bankruptcy notice, have called me to express their displeasure that my client is seeking to discharge a debt.  Sometimes these folks will appear at your 341 hearing to protest and sometimes they will write a “poison pen” letter.

Maybe you have borrowed money from friends or relatives, perhaps as a last ditch effort to avoid bankruptcy.  Now, when you file, that $5,000 or $10,000 you owe your friends is now a debt that will likely be discharged in bankruptcy.  Usually a few thousand dollars will not impact the bottom line of a credit card company, but your neighbor will surely feel the pain.  And an individual who is about to see $10,000 disappear forever will not be happy about that prospect.

What options are available to the holder of a $5000 or $10,000 personal loan?  Generally, not many.  Your now former friend can file an objection to discharge of a debt under Section 523 of the Bankruptcy Code, but hiring a lawyer to pursue this type of challenge will cost several thousand dollars without any guarantee of success.   Your friend can show up at your 341 hearing, but a non-attorney creditor will likely get little relief given the crowded dockets and his likely lack of experience in this setting.

What your individual creditor may do is to write a “poison pen” letter to your judge or trustee.  Such a letter may include allegations of alleged improper behavior by you, such as hiding assets or misstating income.

Believe it or not, many judges and trustees take these poison pen letters seriously.   Chief Judge Bihary’s opinion in the Henry case is typical – she construed the creditor’s letter as a motion to extend time to file a dischargeability complaint and directed the debtor to call the Chapter 7 trustee – and even included the trustee’s letter in her Order.   Sensing a judge’s concern, it is likely that a Chapter 7 trustee who receives such a call will initiate an investigation that will cost you legal fees and possibly lead to problems in your case.

How do you minimize the likelihood that a creditor will create problems for you?  Obviously, the best advice would be to avoid borrowing money from individuals in the first place – friends, relatives, co-workers – who are likely to see your bankruptcy filing as a personal insult.

Note that you should always consult with your lawyer before trying to pay these folks back prior to filing – a repayment right before your bankruptcy filing could be an improper preference.

If you have no choice but to include personal loans in your bankruptcy, make sure that everything contained in your bankruptcy filing is not only true, but can be supported by documentation.

Finally, when possible, I recommend to my clients that they contact the individual lender prior to give the lender the courtesy of a personal notice about the filing.  Often, individuals who lose money in a Chapter 7 debtor are looking for an outlet to express their frustration and disappointment.  Obviously you need to consider this on a case by case basis but do not discount the value of common courtesy.

When it comes to payment plans for Chapter 7 cases, all fees and costs must be paid before the case is filed. At first glance, this may disappoint you, but most people it’s not a problem. The payment plan period usually overlaps with the pre-filing process. In other words, you and your lawyer need time to prepare your case for a successful filing. This work is done along side the payment plan. Once the payments are made and the work is completed, the case is filed. This usually works fine for people unless they have an unusual emergency (beyond just being subject to calls and normal debt lawsuits). In those cases, a payment plan will not work well, and it will be necessary to pay for a Chapter 7 case quickly.

Many lawyers would like to be able to file a Chapter 7 cases before cases were completed, but this is illegal. If an attorney extends a payment plan into the period after a Chapter 7 is filed, he or she is breaking the law. This is because unpaid, pre-filing fees cannot be collected after a Chapter 7 case is filed due to the automatic stay (and later the discharge injunction). Any bankruptcy lawyer who would consider offering an illegal payment plan is either ignorant about basic bankruptcy law or is playing fast and loose with the rules. In either case, you do not want to deal with someone like this. In general, the Court will not excuse you from the law just because you were following the advice of an unethical lawyer.

Unfortunately there is a growing problem of lenders that are refusing to take possession of vehicles surrendered in bankruptcy. We see this not only with motor vehicles but we are also seeing this occasionally in housing. Because of low values some lenders are unwilling to to foreclose to the detriment of the neighborhood. The lender simply finds the cost of paying maintenance, insurance, and back taxes exceed the value of the home.

The same problem exists with lenders that will not repossess certain motor vehicles. This is true because sometimes the costs of repossessing, refurbishing, warehousing and reselling exceed the vehicle’s value. As an example, in 2002 I filed a Chapter 7 bankruptcy for an individual with a 1999 Honda CB750X Nighthawk motorcycle. In 2002 the client owed HSBC over $6,000 on the bike, and the wholesale value of the vehicle was about $3,500. He indicated that he wished to surrender the vehicle but HSBC refused to come out and take possession. So my client kept the motorcycle having it insured with only a liability policy and riding it occasionally when the mood suited him. Since the debt was discharged HSBC was not allowed to try and collect the money from him and they were unwilling to enforce their lien and take back the vehicle.

To my surprise this same individual came back to see me again in 2010. Once again he was in need of bankruptcy protection. So we filed another Chapter 7 case for him last year. Having forgotten the whole state of affairs from the 2002 bankruptcy, my client reminded me once again about the bike that he has kept in his possession since the last bankruptcy. So we listed the motorcycle once again on the clients’ 2010 bankruptcy schedules along with a disclosure note on schedule D that the bike was offered for surrender in debtor’s previous bankruptcy and the lender refused to take possession of the property. In short order, the bankruptcy trustee formally abandoned the estate’s interest in the motorcycle. Once again the lender refused to take possession of the motorcycle.

My client was then asking me how he could get the lien released if he wanted to sell the motorcycle. So, I offered to file a motion to redeem the vehicle for $1.00. My client decided that he did not want to pay me for one extra hour of my time to draft and file the motion to redeem the vehicle. So the bike sits in my client’s garage, to be taken out for a ride on a nice Sunday afternoon on occasion. The title to the bike remains in motorcycle purgatory.

Assuming that another client wished a different outcome in this type of situation, we might have considered several options. First, the bankruptcy law allows the debtor to retain a vehicle where they pay off the lienholder the actual value of the vehicle in one lump sum. This is called redemption as briefly mentioned above. In a case where the lender is refusing to take back the vehicle they are essentially admitting that the vehicle is worthless. So a motion to redeem with the appropriate attorney and client declarations might be granted by he court with an order to pay $1.00 in exchange for the lender’s release of the lien.

Another option is to keep hounding the lender to take back the vehicle by calling them every few days. There is no guarantee that this will work, however the threat of sanctions for a discharge violation as will be discussed later on might prove persuasive.

Yet another option that was suggested by one of my colleagues was to have the vehicle taken to a friendly repair shop to get the oil changed. When the bill for the oil change is not paid to the mechanic. The repair shop can invoke a mechanics lien and sell the vehicle after first notifying the lienholder who has the option of paying the charges. If the lienholder does not pay the charges, perhaps the vehicle can be sold back to the owner/ customer for the price of the oil change.

Finally, you might be able to bring a motion for contempt against the lender for violating the debtor’s discharge order. There is a First Circuit case, Pratt v. GMAC, where GMAC was held to have violated the discharge injunction for having refused to take possession of a vehicle surrendered in the debtor’s Chapter 7 case. Pratt v. General Motors Acceptance Corporation, 462 F.3d 14; 2006 U.S. App. Lexis 22446; Bankr. L. Rep. (CCH) P80,698; 56 Collier Bankr. Cas. 2d (MB) 1016. So in the First Circuit, if the lender refuses to pick up the car, you can reopen the case and ask that the lender be held in contempt if they do not pick up their collateral. This may or may not work in other circuits depending whether a court in another circuit is willing to follow the rationale of Pratt. At a minimum it makes the threat of seeking a discharge violation a means of convincing an unwilling lender to pick up the property.

Raymond Schimmel is a bankruptcy lawyer in San Diego.

How can a person get away without paying me when they file for bankruptcy? The Bankruptcy Code and Rules written by the United States Congress are designed to give a fresh start to the honest debtors who have become unable to timely pay their debts in hopes that they once again become productive members of society and not dependent upon public assistance to live. Unfortunately, this means that creditors sometimes lose their money. This is a policy decision by Congress that the court cannot change. However, there are guidelines as to who may be a debtor and laws relating to possible abuse with strict consequences if any laws are broken. The court functions as a neutral impartial body to rule on disputes that arise in these cases.