Chapter 13 – Page 2 – Rochester Bankruptcy and Debt Relief

Bankruptcy Fraud and Revocation of Discharge

Once the discharge is granted, can it be revoked? This question was addressed by the court had to address in In Re Galan, (W.D.N.Y. 2014).

Section 727(d)(2) provides that a bankruptcy judge should revoke the discharge if, the debtor acquired property that is property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee.

In Galan, the debtor had failed to report his interest in real property and also had failed to disclose that he was in receipt of insurance proceeds related to the property. Once debtor’s failure to disclose these facts to the bankruptcy court was discovered, both the bankruptcy and the U.S. Trustee moved to revoke his discharge.

The court held that revocation of a debtor’s discharge is permitted pursuant to 11 U.S.C. § 727(d)(2), where a debtor “acquired property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee.” The provision is triggered when the debtor is in receipt of or becomes entitled to estate property, either before or after discharge. Since the court found that debtor submitted false testimony with regard to his prior dealings with bankruptcy court, the court disregarded his entire testimony as not credible and disregarded his explanations of his actions. After discussing the facts in detail, the court determined that revocation of discharge was warranted.

Galan demonstrates that it is always a bad idea to mislead the bankruptcy court. Also, debtor’s conduct could subject him to criminal prosecution.

Similarly to the above, a material fraud, which would have resulted in the denial of a debtor’s Chapter 7 discharge had it been known at the time of such discharge, can justify subsequent revocation of that discharge under Bankruptcy Code Section 727(d)(1).

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.

Homestead Exemption and Married Spouses

It is not uncommon for one spouse to seek bankruptcy relief under Chapter 7 or Chapter 13 of the Bankruptcy Code in a situation where title to the real property is held in both parties’ names. Generally, under such circumstances, the debtor typically claims a half interest in the property. Thus, the homestead exemption, under either New York law or federal bankruptcy exemptions, would be used to protect that interest. This creates an interesting legal issue since under New York’s Real Property Law both spouses hold an undivided interest in the entirety of the property. If so, does the homestead exemption have to protect all of the equity in the property?

In In re Naples, W.D.N.Y. Bk #14-10264, the bankruptcy trustee made precisely that argument. The trustee argued that since only one of the spouses had filed bankruptcy, and since the property was held by the parties as tenants by the entirety, creating undivided interest in each spouse, the debtor did not have sufficient homestead exemption to protect his equity in the property. The bankruptcy court disagreed. It held that under those circumstances, for purposes of valuing the debtor’s interest in the property, only one half interest needs to be valued and homestead exemption would be applied only to that half interest. The court reasoned that since the way the title is held creates limitations on each spouses to transfer title without consent of the other spouse, for the bankruptcy court’s valuation, only one half interest needs to be valued.

I think that this is a well thought-out result. If both spouses were filing for bankruptcy, each spouse would be able to apply their own exemption to any equity in the property, so if only one spouse files, that spouse should only need to protect that spouse’s half interest.

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.

Creditors’s Responsibilities After Bankruptcy Filing

On the bankruptcy petition is filed, the bankruptcy automatic stay is in effect in Chapter 7 and Chapter 13 bankruptcies, and virtually every type of collection activity is called to a halt. The bankruptcy court enters an order under 11 U.S.C §362, which prohibits nearly all creditors from taking any type of collection action.

What happens if the bankruptcy automatic stay is violated? If a creditor violates the automatic stay by accident, it must return the money or stop the collection action as soon as it learns about the bankruptcy. However, if the stay violation is done by the creditor on purpose, and if it is considered a “willful” violation, and substantial penalties can apply. In the event of an intentional violation of the bankruptcy stay, the Bankruptcy Code provides strong remedies for the debtor. After a willful stay violation, the debtor can recover not only the money or property that was wrongfully taken, but may also be entitled to attorney fees and even punitive damages.

Since automatic stay applies to all collection activities, with some very limited exceptions, even collections related to unpaid taxes must stop. A recent case of In re Voll, Case No. 13-31058 (N.D.N.Y. 2013), the bankruptcy court held that the New York State Department of Taxation and Finance committed a willful violation of the automatic stay after it had failed to vacate an income execution on debtor’s employer.

The following facts were undisputed. Prior to commencement of the case, the Department of Taxation served an income execution on debtor’s employer, which resulted in the weekly garnishment of debtor’s wages to satisfy a 2012 tax warrant. Subsequently, on June 7, 2013, debtors tiled Chapter 13 bankruptcy. On that same day, debtors’ counsel sent a letter to the Department of Taxation notifying it of the bankruptcy filing and requesting that the referenced income execution be lifted. Debtors scheduled the Department of Taxation as a creditor in their bankruptcy schedules and referenced the outstanding tax warrant. The Department of Taxation was properly listed at the address designated by the Department for receipt of all bankruptcy notices. On June 9, 2013, the Bankruptcy Noticing Center sent the Department of Taxation an official notice of commencement of the case, which the Department admits receiving on June 12, 2013.

Six days later, on June 18, 2013, the Department of Taxation mailed its release of the income execution to the debtor at her residence and to her employer at a post office box in Evansville, Indiana. The mailed release was the first and only document provided by the Department to debtor’s employer to cease the garnishment of Debtor’s wages. After mailing the release, the Department of Taxation took no additional actions.

Notwithstanding the Department being on notice of debtors’ June 7 filing and its issuance of the release; the garnishment of debtor’s wages continued from paychecks issued on June 14, June 21, June 28 and July 5, 2013. The Department was not aware of the continuing post-petition garnishment of debtor’s wages on its behalf until debtors tiled their motion seeking to find the Department in willful violation of automatic stay. Upon receipt of the motion, the Department promptly returned the funds improperly deducted from debtor’s post-petition wages.

The bankruptcy court found that the Department’s acts and omissions constituted a willful violation of the automatic stay. The court stated that it is creditor’s duty to ensure that the garnishment ceases, and that the Department, by waiting for six days before mailing the release to debtor’s employer and failing to make sure that the release was received and followed, had violated automatic stay.

The lesson from Voll is that creditors have their responsibilities once the debtors file for bankruptcy. They have to take affirmative actions to ensure that the automatic stay is not violated and they cannot passively thwart a federal injunction of which one has knowledge by sitting back and allowing acts that are enjoined to continue. When a debtor’s wages are subject to garnishment, the creditor must take immediate action to effectively address its termination.

Chapter 13 Bankruptcy, Co-Debtors and Automatic Stay

I am often asked if automatic stay in bankruptcy will protect debtor’s cosigner, otherwise known as co-debtors, from creditors. The answer to that question depends on a number of factors and the type of bankruptcy filed.

Typically, cosigner liability comes into being after debtor’s friend or relative was asked to cosign a loan, so that debtor could obtain credit. If the debtor is forced to file a bankruptcy sometime thereafter, the following is likely to occur.

In order for the automatic stay provided by 11 U.S.C. §1301 to protect the co-debtor, the debtor must file a Chapter 13 Bankruptcy. Further, the debt filed on must be a “consumer” debt. To be a consumer debt, the debt must have been for the personal, household or family use of the person you cosigned for. If the loan cosigned for was to obtain money for a business, there is no protection for the cosigner. Further, even if the debtor is paying this bill in their Chapter 13 bankruptcy plan, the creditor can still collect from the cosigner.

Further, the law specifically refers to co-debtors who are “individuals,” meaning people. So, if the co-debtor is a business entity, such as a corporation or LLC, the automatic stay does not protect the co-debtor. This can be important where an individual business owner is filing Chapter 13 Bankruptcy, but their business is not filing for bankruptcy protection.

Even if the debtor files a Chapter 13 Bankruptcy, the plan must adequately protect the creditor. “Adequate protection” in most cases means that, in most cases, that particluar creditor must be paid in full. If the plan does not pay the debt in full, then the creditor can ask the court to lift the automatic stay. Once the stay is lifted, the creditor can pursue the cosigner for the unpaid amount. The co-debtor is protected during the life of the bankruptcy, but once the bankruptcy is over, the co-debtor remains liable for the unpaid debt. For example, if the bankruptcy payment plan pays 25% of the debt, the co-debtor remains liable for the other 75% of the debt. For this reason, some bankruptcy payment plans provide for payment of joint debts in full in order to protect the co-debtor after the bankruptcy case is over.

A co-debtor stay is only available in a Chapter 13 Bankruptcy case. If the debtor files a Chapter 7 Bankruptcy, the automatic stay will not apply and once the debtor receives a discharge, the cosigner will be liable for the entire unpaid balance. Further, because of the discharge, cosigner will not be able to receive any money from the debtor. The co-debtor stay lifts at the end of the bankruptcy case, or when the case is dismissed, or when the case is converted to Chapter 7 bankruptcy or Chapter 11 Bankruptcy. After the stay is lifted, the creditor may pursue the co-debtor for payment of any unpaid portion of the debt.

If a creditor knowingly violates the automatic stay protecting the co-debtor, the Bankruptcy Court may hold the creditor in contempt of court, just as if the creditor had violated the automatic stay protecting the debtor. The Court may fine against the creditor and may award money damages to the injured party. Furthermore, any collections actions taken by a creditor in violation of the co-debtor stay are void and unenforceable.

Thus, it is usually a bad idea to cosign any debts. While the debtor may have every intention to pay the debt at the time it is incurred, this may not be true in the future. Co-signer has no control over repayment and oftern enough does not not know when the debtor defaults. Further, any late payments or missed payments will be reported on cosigner’s credit.

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.