Bankruptcy Planning – Page 2 – Rochester Bankruptcy and Debt Relief

Bankruptcy and Eviction

If you are behind on the rent and are hoping to buy some time, or wipe out the obligation to the landlord altogether, under appropriate circumstances, Chapter 7 or Chapter 13 bankruptcy may be a solution. Filing for bankruptcy will usually wipe out the balance due for past due rent as of the date on which the case is filed. Rent for any period after the case is filed won’t be discharged. If the filing of the case is done correctly, you may also be able to buy some more time in the place before you have to move out.

The filing of a bankruptcy petition stops all efforts at collection, including an eviction proceeding. This automatic stay remains in effect until a creditor makes a request to the court and that request is granted, or until the case is closed or dismissed, or when your discharge is granted. Once the Chapter 7 or Chapter 13 bankruptcy case is filed, the eviction action has to stop as soon as the bankruptcy case is filed. Stopping the eviction means the debtor will get some extra time before having to move out.

However, there an exception to the above rule. If there a judgment for possession of the property due to failure to pay rent that was issued before the bankruptcy is filed, it is an exception to the automatic stay. This exception to the automatic stay will not apply if the debtor’s attorney did all of the following:

Specially marked the petition indicating a judgment of possession has been obtained on the rental property;

Provided the name and address of the landlord that obtained the judgment;

Filed with the petition and served on the landlord a certification under penalty of perjury that, under the applicable landlord-tenant law, there are circumstances under which debtor would be permitted to cure the entire monetary default that gave rise to the judgment for possession;

Along with the petition, deposited with the Clerk of the Bankruptcy Court any rent that would become due during the 30-day period after the filing of the bankruptcy petition; and

Within 30 days of the filing of the petition, filed with the bankruptcy court and served on the landlord a further certification (under penalty of perjury) that the entire monetary default has been cured.

If the tenant is being evicted because of a reason aside from failure to pay the rent – for example, conduct causing a health and/or fire risk; use of illegal drugs on property – then there is also an automatic exception from the automatic stay.

This exception applies only to residential property in which debtor resides, if debtor is “endangering” the property or using, or allowing to be used, illegal controlled substances on the property. In order for this exception to apply, the landlord must file with the court, and serve on debtor’s attorney, a certification under penalty of perjury that such an eviction action has been filed, or that debtor, during the 30-day period preceding the date of the filing of the certification, have endangered property or illegally used or allowed to be used a controlled substance on the property.

If such a certification is filed then debtor is required to file an objection with the court and serve such objection on the landlord within 15 days of the landlord’s certification. The court will hold a hearing, and debtor will have the burden of proving that the landlord is incorrect.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Bankruptcy and Judgments

One of the issues that periodically concerns my clients is the one of removing filed judgments after receiving bankruptcy discharge. Initially, filing for Chapter 7 bankruptcy won’t remove a judgment that has been already filed. Whether or not the debtor will need to remove it after receiving a discharge in either Chapter 7 or Chapter 13 Bankruptcy depends on each individual situation.

When a debtor files for Chapter 7 bankruptcy, that debtor is trying to remove his or her personal liability for repayment of certain debts. If a creditor sued the debtor and obtained a judgment before the bankruptcy case was filed, then the bankruptcy filing will eliminate that liability, but the judgment is a separate matter. It is a record of an official result of a lawsuit and remains filed with the court or local county clerk’s office. Even when the bankruptcy discharged liability for the debt, the record of the judgment remains in place.

In those situations, debtors have two different options. Option one is to do nothing. Assuming the underlying debt is has been discharged in your Chapter 7 bankruptcy case, the judgment remains nothing more than a piece of paper.
The creditor cannot freeze debtor’s bank account, seize wages, or take any further collection action. However, the judgment may remain on record as a valid lien against any property you owned at the time your Chapter 7 bankruptcy was filed. In New York, the judgment is automatically a lien against real property. The creditor can’t do anything with the lien, but it will need to be paid off in the event that you try to sell the property while the judgment is in place, or removed via a motion under Section 522(f) of the Bankruptcy Code. A judgment does not last forever. Judgments expire in 10 years under New York laws, but may be extended of an additional 10 year period.

Some debtors prefer to have discharged judgments removed. That brings us to option two. Under New York Debtor and Creditor Law Section 150, once a year has passed since the debtor’s discharge in bankruptcy, the debtor may apply for an order, directing that a discharge or a qualified discharge of record be marked upon the docket of the judgment. If the debtor fails to take this action, the judgment will remain on record with the New York Supreme Court or New York Civil Court and will remain enforceable.

Given the above, the debtors have options in dealing with any discharged judgments. Each debtor’s financial circumstances and other factors will factor into the decision whether to have any outstanding judgments removed. In my experience, unless the judgment is impairing the debtor’s interest in real property, vast majority of debtors will not seek to remove discharged judgments.

Banking After Bankruptcy

Most debtors are concerned about being able to open bank accounts after completing their bankruptcy and receiving their discharge. While most debtors will not have any difficulty opening new bank accounts, some debtors are unable to open a checking account after receiving their bankruptcy discharge. Typically, this is true for the debtors who have had a problematic history with their bank, involving bounced checks or excessive overdraft activity. As a result this negative information was reported to a check reporting company known as Chex Systems. Such negative information remains in this database service for five (5) years and is readily accessed and utilized by its members (usually financial institutions) in making decisions about who will be allowed to open new checking account.

While the debtors will not be removed from Chex Systems just because their debt to the bank was discharged in bankruptcy, as it is not required to remove a previously submitted, accurate report. However, Chex Systems is credit reporting agencies just like Equifax, Experian and Trans Union, and as such are required to follow the Fair Credit Reporting Act (“FCRA”) and other laws. The banks reporting to Chex Systems are required to regularly update their consumer reports with accurate information. Accordingly, when the debt that formed the basis of their negative report is discharged in bankruptcy, the member bank must report the account as “$0.00 balance due, discharged in bankruptcy”, or something similar. If this is not done, there is a dispute procedure that is very similar to the procedure employed to fix a credit report that is includes inaccurate, post-bankruptcy entries:

Step 1: Order a copy of your consumer report from Chex Systems, whose mailing address for disputes is: 7805 Hudson Road, Suite 100, Woodbury, MN 55125.

Step 2: Review the Chex Systems consumer report for accuracy, making sure that each discharged debt is reported as “$0.00 balance due, discharged in bankruptcy”.

Step 3: If an inaccurate entry is noted, you should send to Chex Systems, preferably by certified mail:

A copy of the Chex Systems report, with the inaccurate information highlighted or flagged in some fashion;

A copy of your bankruptcy discharge;

A copy of Schedules “D”, “E” and “F” from your bankruptcy petition;

A letter explaining that the disputed item is no longer accurate, and that it should be reported as “$0.00 balance due, discharged in bankruptcy”.

Step 4: Chex Systems will have 30 days to investigate the dispute. During this time the FCRA requires it to contact the member bank to verify that the account now has a $0.00 balance due because of the bankruptcy Discharge.

Assuming that Chex Systems and the member bank follow the law, the above steps should result in the previously reported negative information either being deleted or corrected so that it no longer acts as an impediment to the debtor opening a checking account.

In order to prevent this type of a problem, prior to an actual bankruptcy filing I advise my clients to open a checking account in a bank where they do not owe any money. Debtors will be able to use this new account after their bankruptcy filing without any difficulty.

Executory Contracts and Leases in Bankruptcy

In Chapter 7 and Chapter 13 Bankruptcy cases, debtors have an opportunity to either continue or terminate any executory contracts or leases. That typically means that debtors will list their executory contracts and unexpired leases on the bankruptcy petition and declare their intention to either to accept or to reject those contracts. If such contracts are not timely assumed, they are deemed rejected, and debtors are released from further performance under those contracts.

An executory contract is an agreement that has not been completed. A contract is an agreement between two or more parties to perform certain specified actions. Once the parties complete all contractual obligations the contract becomes fully executed and the parties to that contract have no further obligation to act under that contract. An example of an executory contract is an agreement to sell property in which the buyer and seller agree to perform certain actions including inspecting the property, making certain repairs, obtaining financing, transferring title, delivering possession and making payment. Until all contractual requirements are met, the contract remains open to be executed. One example of an executory contract that is very common is cell phone contracts. Cell phone contracts are executory contracts during the typical two-year contract period. By including the cell phone provider as a creditor in the bankruptcy petition, the contract is automatically terminated, and any early cancellation penalty becomes a dischargeable debt just like any other unsecured debt.

An unexpired lease is a form of contract for the use of certain specified real or personal property that has a specified length of time remaining on the length of the contract. An example of an unexpired lease is a rental agreement for the use of a car or a house where the owner agrees to provide the property to the lessee for a set number of months or years and the lessee agrees to make payments for using that property. For bankruptcy purposes, a timeshare falls into this category.

When a debtor files for bankruptcy, debtor required to list those executory contracts on the bankruptcy schedules because under Section 365 of the U.S. Bankruptcy Code, the trustee is given the power to assume or reject any executory contract or unexpired lease. In other words, bankruptcy trustee can, if he or she chooses, take over the obligation or let it lapse. If the debtor is in Chapter 7 bankruptcy, the trustee gets 60 days to accept or reject an executory contract. A failure to do so leads to an automatic rejection. In Chapter 13 bankruptcy, the trustee may usually assume or reject an executory contract or unexpired lease of residential real property or of personal property at any time before the confirmation of the Chapter 13 Plan.

Bankruptcy code section 11 U.S.C. 365 requires that the debtor assume an executory contract or unexpired lease in a Chapter 7 Bankruptcy within 60 days of filing the case; and in all other chapters of bankruptcy before confirmation of a plan. The court may extend the time to assume such agreements for cause. In the case of non-residential real estate agreements, the time to act is extended to 120 days or longer by court order.

Depending on the situation, the debtor may either assume to reject any executory contract. This decision generally depends on the existing financial circumstances.

Upcoming Chapter 7 and Chapter 13 Bankruptcy Filing Fees Increases

It seems inevitable that bankruptcy filing fees are going up again. The Judicial Conference which determines the amount of various filing fees associated with bankruptcy cases has approved a fee increase which will be effective on June 1, 2014.

The fees for filing a chapter 7 case will increase from $306.00 to $335.00. The fees for filing a chapter 13 case will increase from $281.00 to $310.00. This is a $29.00 increase in the filing fees for both Chapter 7 and Chapter 13 Bankruptcies.

The fees for filing an adversary proceeding will increase as well to $350.00. However, debtors are not charged filing fees for adversary proceedings. Chapter 11 filing fees will increase to $1,717.00.

Unfortunately, it will get more and more expensive for the debtors to achieve any relief from their debts.

Debtors and Failure to Turnover Nonexempt Assets

In Chapter 7 bankruptcy cases where debtors have nonexempt assets, debtors have an obligation to transfer those assets to the bankruptcy trustee. It is very common for such assets to be debtors’ tax refunds. In this situation, at the meeting of the creditors, debtors are asked to sign a stipulation which is usually incorporated into a subsequent court order, agreeing to turn nonexempt tax refunds, or a part of them, to the bankruptcy trustee. If debtors do not do so, they are subject to serious consequences which may include loss of their discharge, contempt of court or monetary penalties. The loss of discharge is the most serious penalty from the debtor’s point of view, since it will leave the debts nondischargeable in this or any subsequent bankruptcy that the debtor may file.

But what if the debtors are unable to turn over such assets due to financial reasons? What if the tax refunds were used for living expenses since debtors simply had no other choice?

This issue was recently addressed in In Re Swan, Case No. 08-11210 (W.D.N.Y. 2014), where Judge Michael J. Kaplan had to decide what the consequences should be for the debtors who had failed to turn over nonexempt portion of their tax refunds to the bankruptcy trustee. The Chapter 7 trustee sought denial of discharge, as well as a finding of contempt of court and monetary penalties. Judge Kaplan held that in the absence of dishonesty on the part of the debtors, loss of discharge would be too harsh of a remedy and the court should not automatically deny or vacate discharge. Judge Kaplan held that if failure to turn over the assets is not as a result of dishonest conduct on the part of the debtors, the appropriate remedy is a monetary judgment that the trustee would be free to collect. Further, Judge Kaplan also held that if the debtors are unable to turn over such assets to the trustee, they have an obligation to seek immediate relief from the Court.

This case further confirms that debtors always have to try to follow the court’s orders and, if they are unable to comply with them, they have to seek relief from the court. While the debtors in Swan did not lose their discharge, they were held in contempt of court and were subject to monetary penalties. All of this could have been avoided if they kept their bankruptcy attorney involved in the case and notified him of their financial difficulties.

Fraudulent Conveyances and Bankruptcy

One of the issues that represents a significant problems for bankruptcy attorneys is that of fraudulent conveyances. Generally, a fraudulent conveyance is a transfer of money or property from a debtor to someone or something else when either (1) the debtor intends to defraud creditors, or (2) the debtor received less than a reasonably equivalent value in exchange for the transfer, and made it while insolvent. For example, if a husband transfers his house out of his name to the wife so his creditors wouldn’t get it, the transfer is a fraudulent conveyance. Such transfers can create quite a few problems in bankruptcy.

The limitations period for avoidance of fraudulent conveyances has changed over the years, but currently it is two years under the Bankruptcy Code (Section 548) and whatever longer period is available under state law (Section 544). Since I practice in New York, I will use its laws as an example. New York has a six-year statute of limitations for avoidance of fraudulent conveyances.

Earlier this year, in In re Panepinto, Case No. 12-11230 (W.D.N.Y. 2013), Judge Kaplan of the Bankruptcy Court, Western District of New York, found that a transfer of a house to the debtor’s spouse 4 years prior to the bankruptcy filing was a fraudulent conveyance. In 2008, a judgment creditor was seeking to collect on a debt owed by Mrs. Panepinto, who owned a house with no mortgages or other liens encumbering the property. So, to thwart her judgment creditor, she transferred the house to her husband with no consideration for the transfer.

Last year, Mrs. Panepinto filed for Chapter 13 bankruptcy, and her judgment creditor sought to set aside the transfer as a fraudulent conveyance under New York Debtor and Creditor Law §273. The Bankruptcy Court sustained the judgment creditor’s challenge to the transfer. The reason the timing of the transfer is significant is because at the time of the transfer New York’s homestead exemption was lower than today, $50,000.00 rather than $75,000.00. Depending on what the value of the property was at the time the bankruptcy was filed, a portion of the value of the house may not be exempt. Since the court did not have this information presented, the court reserved its decision on the amount of the exemption pending proof of its value.

The lesson is that before transferring ownership in property, a debtor should seek advice of an attorney since any improper transfers may change status of assets from exempt to non-exempt or created other problems if subsequent bankruptcy is filed.

Homestead Exemption and Multi-Family Residences in New York

Once in a while, I represent debtors who own a multi-family properties. In the past, the local Rochester rule has been to allocate the homestead exemption solely to the portion of the property that is used as the debtor’s residence.

However, in In re McCarthy; W.D.N.Y. Bk #11-31499, Syracuse Bankruptcy Court Judge Margaret Cangilos-Ruiz has ruled that a bankruptcy debtor can claim a homestead exemption in Chapter 7 bankruptcy on an entire parcel or residential property, even if the debtor only resides in part of the property. In McCarthy, the debtor owned property containing a two family house, both units of which were rented out, and a smaller building in the back where the debtor both worked and lived. The creditor argued that the homestead exemption should only be allocated to that portion of the lot that is used as the debtor’s residence. The court ruled that the debtor could exempt the entire parcel.

McCarthy in part relied upon an earlier decision of Judge Cangilos-Ruiz, In re Ford, 415 B.R. 51 (Bankr. W.D.N.Y. 2009), aff’d. on appeal, Cmty. Bank, N.A., v. Ford, Civil Case No. 5:09-cv-633 (GLS) (N.D.N.Y Dec. 4, 2009). In Ford, the debtor lived on one parcel, an the septic and well water for the homestead parcel came from an adjoining vacant parcel. The parcel with the residence also included two sheds used by the debtor for both personal and commercial purposes. The court allowed the debtor to apply the homestead exemption to the vacant land parcel as well as the property with the residence.

The McCarthy decision also relied on a decision of Western District of New York Bankruptcy Judge Michael J. Kaplan, In re Rupp, 415 Br.R. 72 (Bankr. W.D.N.Y. 2008). In Rupp, Judge Kaplan allowed the owner of a two family residence to exempt the entire parcel as a homestead.

McCarthy decision did not address an unpublished 1992 decision of the Hon. Michael A. Telesca, District Court Judge for the Western District of New York in Randall v. Mastowski, CIV-92-6049T. Mastowski was an appeal of a decision by former Rochester Bankruptcy Judge, Hon. Edward D. Hayes, In re Mastowski, 135 B.R. 1 (Bankr. W.D.N.Y. 1992). The debtor in that case owned two double houses, and only lived in one of the four units. Judge Telesca held that the debtor could only claim a homestead exemption “on that part of the property . . . that she occupies as her primary residence.”

In Rupp, Judge Kaplan acknowledged the Mastowski district court decision, but held that “the binding effect of the decision of a district judge of this district upon all bankruptcy judges of this district depends on whether the district judge published the decision.”

Whether the McCarthy decision will be followed in Rochester by Judge Paul R. Warren is not quite clear at this time. This issue has not been extensively litigated in the recent years perhaps because New York’s homestead exemption was so limited. Since the homestead exemption has been increased to $75,000 in Western New York, and up to $150,000 elsewhere in the state, I anticipate more litigation involving homestead exemption claims for multi-family properties in the foreseeable future.

Changes to the Bankruptcy Means Test as of April 1, 2013

Once again, the means test figures for median income have changed as of April 1, 2013. In New York, it means that the amount of income that the debtor can have before being forced into a Chapter 13 Bankruptcy is going to increase.

Through March 31, 2013, a single debtor in New York could have $46,821 in income in income and still be able to file Chapter 7 Bankruptcy. Starting April 1, 2013, that figure has been increased to $47,790. Similar increases will take place for all family sizes. The comparison of the existing and new income limits is below.

Old Income Limits

FAMILY SIZE

1 EARNER 2 PEOPLE 3 PEOPLE 4 PEOPLE *

$46,821 $58,106 $67,652 $81,522

New Income Limits

FAMILY SIZE

1 EARNER 2 PEOPLE 3 PEOPLE 4 PEOPLE *

$47,790 $59,308 $69,052 $83,209

* Add $7,500 for each individual in excess of 4.

While the increases are not large, they are an improvement on the last set of income limits. The reason for a slight growth in the median income is the slight growth in the earnings of an average American family. Since the economy is down, employers do not give employees significant wages increases. As a result, the American median family income has grown only slightly, and means test figures increased only moderately.

If you are contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, New York, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Dischargeability of Debt and Objections by Creditors

When debtors meet with me and tell me that they want to file for bankruptcy, I ask them questions about their debts, assets, and their financial affairs over the last few years. I also ask is how long ago they last used their credit cards. If they tell me that the credit cards were used within 90 days prior to the filing, I ask them to provide me with their credit card statements and information with regard to what was bought. All of this information helps me to assess whether I am likely to see potential objections from creditors with regard to dischargeability of one or more debts.

According to 11 U.S.C. §523(a)(2), a debt is presumed to be nondischargeable if a Debtor charges more than $600 for luxury goods on a credit card with in 90 days, or takes cash advances of more than $875 within 70 days of filing for bankruptcy. This presumption can be rebutted, but the burden is on the debtor to prove that the purchases did not involve luxury goods or services.

Another reason a creditor may object to the discharge is fraud and misrepresentation of debtors’ assets or income in order to obtain credit. If debtors misrepresent their financial condition in order to obtain a loan or credit line, and the creditor relies upon such misrepresentation when agreeing to extend credit, the creditor can object. For example, if the debtor earned $15,000 a year, but stated on the credit card application that he was earning $50,000 per year in order to get get approved, this would be a material representation likely to result in objections being filed.

Hiding an asset or failing to disclose it in a bankruptcy proceeding are also grounds to challenge a debtor’s discharge. For example, if you own an investment property, especially one with equity, which could not be protected under the Bankruptcy Code, and fail to inform the bankruptcy court of this asset, then a creditor may challenge debtor’s right to a discharge pursuant to 11 U.S.C. §727. Under such circumstances, a debtor may also get charged criminally.

Finally, the transfer of assets to family members or others just before filing bankruptcy can cause a creditor to challenge the bankruptcy case. It is particularly a problem if the asset transferred would not have been fully exempt in Chapter 7 Bankruptcy, and the transfer was made with the intent to deprive a creditor of a benefit. If the debtor does this, either the bankruptcy trustee or any creditor who might have received a benefit from the sale of this asset may allege you committed a fraudulent transfer of an asset. The Federal look-back period under 11 U.S.C. §548 and New York’s look-back period is six years.

In view of the above, I always advise my clients to stop using any credit cards at least 90 days prior to filing for bankruptcy, disclose all their assets, and be honest with regard to any financial transactions.