Whenever I file a Chapter 13 on behalf of a client, I remind my client that five years is a long time, and that a lot can happen during the term of a Chapter 13. Marriage counselors reguarly opine that financial stress often leads to marital discord, so it should come as no surprise that the stresses inherent in a Chapter 13 will result in marital problems.
What should you do if your marriage begins to unravel during the course of your Chapter 13. There are obviously many scenarios that I could discuss, but I am going to start with a real life example that I am watching develop currently.
The case study I am presenting involves a Chapter 13 client who was married at the time we filed over two years ago. Because the debts at issue were hers alone, she filed individually. Over the course of the past two years, her marriage has floundered and she has been separated from her husband for well over 6 months. She advises me that there is no hope for rehabilitation.
My client has primary physical custody of her children, and she has moved into a rental home. Her estanged husband lives in the former marital domicile. As best I can tell, there is a small amount of equity in the home – perhaps $10,000 to $15,000.
My client is also struggling financially. Although she receives child support, she is having a difficult time making ends meet. Gas prices, of course, are through the roof, as are the costs of other essentials like food and clothing.
The only secured debt in our case was a vehicle loan, but now the vehicle is non-operational and she is prepared to surrender it. There is a small amount of outstanding tax debt and around $25,000 or unsecured debt.
If there was no divorce issue, this would clearly be a case that is appropriate for conversion to Chapter 7. My client’s income is below the median income for a 3 person household and all of her debts are now unsecured.
The problem, of course, has to do with the pending divorce issues. If my client was to convert to Chapter 7, it would be in her best interest – in a bankruptcy context – to surrender all interest in her house. She is not living there and it does not make any sense for her to reaffirm a financial obligation on someone else’s house. After all she has no control over whether her soon-to-be ex-husband will make payments regularly or even maintain insurance on the property. If the property insurance should lapse and the house burns down, my client could find herself with hundreds of thousands of dollars of liability, not to mention devastating derogatory marks on her credit.
From a divorce perspective, however, the decision is not so clear. Right now, the ex-husband is living in the house and presumably wants to stay there. If there was no bankruptcy complication, my client could use her title and equitable interest in the house as a negotiation point. Ever dollar that the ex-husband spends to pay down the mortgage is creating equity that my client may have a claim against. Arguably, my client could ask a divorce court judge to award her possession of the house, so as to provide a stable living environment for her kids. The estranged husband most likely does not want to live with the uncertainty. My client could bargain away her equitable interest in the house in exchange for a larger property settlement or perhaps for some other concession.
If my client was to convert to a Chapter 7 now and surrender all interest in her house, she would be giving up that leverage. In addition, the estranged husband could use the bankruptcy filing against my client – perhaps questionning her financial stability or arguing that his credit has been damaged if the mortgage lender forces him to refinance.
Everything else being equal, my advice to my client is to consult with her divorce lawyer as soon as possible and to get that process moving. The bankruptcy trustee and judge usually will not have a problem with a property transfer in a Chapter 13 that is pursuant to a divorce. If she is going to convert to Chapter 7 – and she really does need to do so – she should wait until her divorce case is more settled.
Ideally, she should not have waited to finalize the divorce, but she did. Now she may have to wait several months, but, in my view, this is her best course of action.
Filed under Chapter 13 issues, Divorce and bankruptcy issues by 
Not that it is any surprise, but disgraced Falcon’s quarterback Michael Vick has filed for bankruptcy. The case was filed as a Chapter 11 reorganization in the Eastern District of Virginia. Chapter 13 was not available to Vick because his debts far exceed the debt limits imposed by the Bankruptcy Code on Chapter 13 cases.
Under a Chapter 11, Vick will propose a repayment plan for creditors. Generally, plans in Chapter 11 cases are filed within the first year after filing. Here, I don’t see that Michael Vick can possibly know about his future earnings. If he gets past state charges, if the NFL reinstates him and if a team is willing to pay him for his services, then a Chapter 11 would be feasible.
If there was ever any question that a debt crisis can happen to anyone, Michael’s story shows that bad choices and bad luck can land anyone in bankruptcy court. Until the money starts rolling again, however, Michael Vick has just created on-going employment for a lot of lawyers on both the debtor and creditor side.
Thanks to my friend Scott Riddle for reporting the Vick filing on his excellent Georgia Bankruptcy blog.
Filed under General consumer bankruptcy info by
The United States Supreme Court does not frequently hear cases involving consumer bankruptcy law. However, this past February, the Supreme Court considered the case of Robert Marrama, a Chapter 7 debtor in Massachusetts.
Mr. Marrama filed a Chapter 7, but failed to disclose on his schedules that he had put title to a Maine vacation house into a trust. He also failed to disclose an income tax refund. Interestingly, it appears that Mr. Marrama did reveal the existence of the house, but listed his ownership interest (equity) as zero.
The Chapter 7 trustee checked property records and discovered the transfer (it is unclear to me when this transfer occurred, although the transfer itself does not seem to be an issue here). The trustee filed a motion to undo the transfer and take title to the house for the purpose of selling it.
Mr. Marrama then moved to convert his case from Chapter 7 to Chapter 13. The trustee objected and the bankruptcy judge ruled against Mr. Marrama as did several other appeals courts. The case eventually made its way to the Supreme Court, where Justice John Paul Stevens writing for the majority, stated that while honest debtors were entitled to convert their Chapter 7 cases to Chapter 13, a bankruptcy judge is entitled to take away that right because of “fraudulent conduct.”
The case will be sent back to Massachusetts where Mr. Marrama will no doubt lose all of his non-exempt property. Chapter 7 cases cannot be dismissed without permission of the court and this is clearly not a case where such permission will be granted.
The point here – it is vital that you reveal all of your assets and debts to your attorney and to the courts. Over the past few years, the United States trustee and Chapter 7 trustees have become much more vigilant in looking for assets. Recently one of the attorneys for the United States trustee told me that her office’s goal is to push people out of Chapter 7 and into Chapter 13. Chapter 7 trustees are being strongly encouraged to look closely for hidden assets.
Thanks to Scott Sagaria of the California Bankruptcy blog for writing about the Marrama case.
Filed under Chapter 7 issues, Fraudulent transfers, General consumer bankruptcy info by
This morning, I received an email from a gentleman named Jim, who writes:
How can I file chapter 7 by myself without paying someone, anyone $ 99.00 $199.00, $299.00 etc… Three different people( with a financial intrest of course) said representation is required.
Here is my response: Jim, you certainly have the right to file a Chapter 7 case by yourself. The forms are available either on-line or at an office supply store. There are also several books about how to do this. I am currently reviewing a book entitled The Complete Chapter 7 Personal Bankruptcy Guide
Here are the issues:
1. the bankruptcy process has become significantly more complicated since October, 2005, when the BAPCPA changes to the bankruptcy laws were enacted. I know a number of lawyers who used to file the occasional Chapter 7 here in Atlanta, but who have now given up the practice because of the complications. In particular, you need to fully understand how the median income test and the means test works – if you do the calculations incorrectly, you could end up in a deposition at the United State’s trustee’s office, face a motion to dismiss or face a motion to convert to Chapter 13.
2. you need to understand about the pre-filing credit counseling requirement as well as the pre-discharge financial management course requirement
3. in order to actually file your case, you will need to go to the Clerk of Bankruptcy Court and scan your pages to get your case filed. I suspect that this process is not particularly complicated, but I have not used the scanning equipment at the Clerk’s office.
4. you cannot dismiss a Chapter 7 voluntarily if you change your mind. For example, if you file, but it turns out that you earn too much or own too many assets the judge may not let you out of your case, at least until after your assets are liquidated.
5. you need to understand how the Georgia exemption law works and how it applies in Chapter 7 to protect property that the law allows you to protect. If you don’t properly declare property as exempt even if the law would otherwise allow you to protect it, then you could lose your property anyway.
6. do not expect to receive advice from the Chapter 7 trustees or the U.S. Trustees. Their interest is to maximize the recovery of the estate (i.e. your creditors).
While folks contemplating bankruptcy obviously do not have a lot of money, I think that in most situations the complexity (which, no doubt is unnecessarily complex) makes a pro se filing a mistake.
