A recently widowed, elderly woman qualifies for Chapter 7 under the median income/means test but is concerned that the Chapter 7 trustee will assert a claim on the $35,000 insurance proceeds she is expecting following the death of her husband. The woman needs to file a Chapter 7 to get rid of credit card and medical debt. Are the insurance proceeds exempt?
Here is my take: I read 44-13-100(11)(C) as the applicable Code section. The statute reads as follows:
A payment under a life insurance contract that insured the life of an individual of whom the debtor was a dependent on the date of such individual's death, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.
It appears therefore that the potential debtor must must qualify as a "dependent" and that the funds are "reasonably necessary" for her support.
I suspect that the question of whether she is a dependent will be a facts and circumstances test. I don't know what the case law says about this but my guess is that if the widow can show that she relied upon her husband for support then she would qualify as a dependent.
With regard to the "reasonably necessary" issue, I have been involved in several cases where a lump sum workers comp settlement of $75,000+ or a Social Security past due benefit check of $25,000+ was declared fully exempt based on the argument that the debtor would need this money for future medical care and to make up for loss of work capacity.
In all of these cases the bankruptcy judges were willing to exempt the full amount of the settlement. What we did was to make a math argument that the funds would be used for (1) regular living expenses, (2) future medical care (3) housing modifications, etc.
Here, I suspect that the prospective debtor could identify a monthly figure by finding out how much the debtor could expect to receive from an annuity if she took the life insurance proceeds and invested them or by dividing the settlement by the number of months left in her expected lifespan and plug that into her budget.
The bottom line – I think the debtor needs to be advised that there is some risk that her bankruptcy judge will find some of her life insurance proceeds non-exempt. I don't think that it is a big risk but there is some risk nonetheless. She also needs to be advised that this issue will probably have to be argued. My sense is that the US Trustee has been using the IRS as a model for addressing assets in Ch. 7 cases and in an IRS setting (Offer in Compromise or Installment Agreement) the insurance proceeds would be in play for the IRS. How much influence the IRS policies are having on the U.S. Trustees is an unknown.
Thanks to my colleague Scott Riddle for raising this interesting and relevant question for discussion. Scott and I frequently engage in e-mail discussions to brainstorm possible issues in cases and this blog post is derived from one of those discussions. Any errors in this analysis is mine alone. Scott publishes a very comprehensive and interesting blog called the Georgia Bankruptcy blog which I recommend to any lawyer or potential debtor who is interested in Georgia bankruptcy law.
Technorati Tags: insurance proceeds and Chapter 7 bankruptcy, life insurance proceeds and bankruptcy exemption, Scott Riddle, reasonably necessary for support of the debtor
Filed under Georgia Bankruptcy, Protected property issues by 
One of the consequences of the new bankruptcy law has to do with the increased obligation on the part of both the lawyer and our clients to provide extensive documentation to the trustee and the courts. Since much of this documentary information is mandatory, your filing will be delayed if we do not produce it at the time of filing.
The information you will need to have on hand will vary based on where you file. In the Northern District of Georgia, which includes Atlanta, Newnan, Rome and Gainesville, we have a number of local rules that call for specific documents.
By contrast, there are different local rules for filings not in the northern district.
The Bankruptcy Court for the Middle District of Georgia is the appropriate venue for debtors in Macon, Columbus, Athens and surrounding towns. The Southern District includes Savannah, Waycross, Augusta, Statesboro and Dublin. Pursuant to the Bankruptcy Code, you are required to file bankruptcy in the district where you have lived for the greater part of 180 days (i.e. 3 months and 1 day). There are special calculations that we would do if you have moved several times in a short period of time.
In addition, the new Code limits your bankruptcy protection if you move from one State into another State. If you now live in Georgia but moved from out of State within the last two to three years, make sure to make your lawyer aware of your move. Even if you have been in Georgia for a year or longer, laws from your previous state may apply in your case as Congress has attempted to stop people from “venue shopping.”
Filed under General consumer bankruptcy info, Georgia Bankruptcy by
Several months ago, I was invited by my colleague Marvin Solomiany to speak at a Family Law seminar presented by the Atlanta Bar Association. Marvin explained that my role would be to discuss bankruptcy at the "hot tips" part of the seminar. It turns out that the "hot tips" presentation is where five lawyers take seven minutes each to brief the family lawyers (i.e. divorce) about our areas of specialty. Besides myself, there was an immigration lawyer, a real estate lawyer, a criminal defense lawyer and a business lawyer. As I commented to the crowd, if there is if there is speed dating in hell, five lawyers in 35 minutes is what you would get!
At first I thought that the idea of speaking for seven minutes was kind of silly, but the more I thought about this, the more it made sense to me. The point of the "hot tips" presentations was to expose family lawyers to two or three points about another area of law and to introduce them to lawyers who practice in those areas. This was a chance for me to gain exposure before 75 or 80 lawyers who I otherwise might not meet.
Because I only had seven minutes, I was forced to focus on three or four points that would be most relevant to a family law attorney. Here is what I said:
1. a family lawyer ought to think about whether a joint bankruptcy – prior to the entry of a final divorce decree – makes sense. Since financial disputes can be the source of many divorces and settlement agreement arguments, there are some circumstances when a joint divorce while the couple is still married can make sense to eliminate issues. Bankruptcy can allow a divorcing couple to cancel leases, break contracts, surrender secured collateral and reduce or eliminate credit card debt. A joint bankruptcy does not always makes sense, but sometimes it does.
2. divorce lawyers need to be aware of Bankruptcy Code Sections 523(a)(5) and (a)(15). These Code Sections talk about what divorce related debts are dischargeable. Under the current (post October 17, 2005) law, pretty much any divorce related debt cannot be discharged in bankruptcy. However, cases filed prior to October 17, 2005 are governed by the old version of Code Section 523(a)(15) which provides that some divorce/separation related debts may be dischargeable. This means that family law attorneys need to be aware that two different versions of the same statute might apply – depending on when the debtor/spouse filed for bankruptcy.
3. financial disclosures are a big part of domestic relations litigation. I pointed out to the family law lawyers that bankruptcy schedules are public record and that the financial information within a petition could be used to evaluate the accuracy of financial disclosures in divorce litigation. Family law lawyers should know how to access bankruptcy paperwork and should know how to read the schedules.
4. my final suggestion was that family law attorneys should find blogs (like this one) and subscribe to those blogs. In my view, a good legal blog will include case studies, case law updates and other observations that can help a non-specialist keep up with developments that might affect his practice. News alerts are another good way to keep current. It still surprises me that so few lawyers use blogs, much less publish them. I strongly believe that my participation in the blogosphere has made me a better lawyer and I encourage my colleagues at the bar to take advantage of this powerful and free resource.
Technorati Tags: divorce and bankruptcy law Georgia, 523(a)(5), 523(a)(15), lawyer blog, bankruptcy schedules
Filed under Divorce and bankruptcy issues, Georgia Bankruptcy by
What happens when you surrender real estate in a bankruptcy? What does it mean for the trustee to "abandon interest" in the property. And most importantly, are you – the debtor – responsible for any deficiency balance that may arise after the case is over and the property sold?
This question was posed to me by Christina, one of my recent Chapter 7 clients. Because of a loss of income, Christina had surrendered back to the mortgage lender a home that she valued at $350,000. She estimated that the debt owed to the first and second lender totaled $375,000.
Recently, Christina has been receiving letters from the trustee and the second mortgage lender and she is unsure about what this all means. Most importantly, she is concerned that she may end up with personal liability if the foreclosure sale of the property results in a shortfall. Because this question raises issues that can apply in a wide range of situations, I decided to answer it on my blog.
First, Christina needs to understand that by surrendering her property, she is relieved of all liability arising from any subsequent sale and shortfall. By surrendering the property, the debt to the mortgage lenders becomes an unsecured debt which is dischargeable in the Chapter 7. I should note that Christina's mortgage lenders, like any other creditor in her case, do have the right to file a challenge to her bankruptcy if they suspect fraud or other wrongdoing by Christina.
I have seen challenges to bankruptcy discharges in cases of mortgage fraud but, absent some unusual bad faith circumstance, it is very unlikely that any credit would file a challenge. In Christina's case the deadline for filing challenges has long past so she is in the clear.
So, the brief answer to her question – she will not owe any money to the trustee or to either the first or second mortgage lender.
Now, let's take a look at what is going on behind the scenes and why Christina is getting all of those letters.
When Christina filed her Chapter 7, her filing triggered a basic bankruptcy protection called the "automatic stay." This "stay" means that all creditor actions, including foreclosure, repossession, wage garnishments, etc. must stop immediately. Christina's bankruptcy filing also triggered the creation of a bankruptcy estate, administered by a Chapter 7 trustee. The trustee's job is to investigate Christina's financial picture to see if there are any assets to liquidate.
Although Christina filed a Statement of Intention providing for a surrender of the property, the creditor did not get it back because the Chapter 7 trustee had to perform his own investigation to see if there was any equity. Further, the automatic stay remained in effect while the trustee was performing his investigation.
It is interesting to note that the trustee's investigation has just concluded (August, 2006) although this case was filed in October, 2005. The reason for the delay – the huge backlog of cases filed prior to the October 17, 2005 change in the bankruptcy law. The mortgage creditors in this case have been sitting for almost a year without any payments waiting for the trustee to finish his investigation – no wonder they are not very happy!
On August 1, 2006, the trustee filed his Notice of Abandonment. This means that the trustee has concluded that thereis no equity for the estate.
Now that the trustee has abandoned any claim to equity in the property the mortgage company will move for relief from the bankruptcy stay and will proceed with foreclosure. Even if the foreclosure results in a deficiency in favor of either the first or second lender, Christina will not owe anything – her obligation is discharged.
Technorati Tags: Chapter 7, bankruptcy, mortgage deficiency, motion for relief from stay, automatic stay, Chapter 7 trustee, Notice of Abandonment, surrender of property
Filed under Automatic stay issues, Georgia Bankruptcy by
Yesterday, I met with a potential client who was facing immediate foreclosure (today) and I encouraged him not to file Chapter 13 to stop the foreclosure.
During the course of our discussion, I learned:
- that he had previously filed a pro se Chapter 13 earlier this year that was dismissed for non-payment
- because of a reduction in overtime hours, this potential client did not have sufficient income to pay his regular mortgage payment, much less contribute to a plan to cure his arrearage
- he had been in his house for less than a year and had no equity (and actually owed more than the property was worth when late fees and penalties were included)
- his real estate agent was pushing him to file the 13 because she had a potential buyer lined up
- he was very concerned that a foreclosure would cause damage to his credit
I expressed to this gentleman that, in my opinion, Chapter 13 was a waste of his money. Here is why:
- we could not propose a feasible plan since he did not have enough disposable income to pay his regular mortgage, much less contribute to a Chapter 13 plan
- his credit was most likely already badly damaged because of his first unsuccessful bankruptcy and his failure to pay his first or second mortgage for almost a year. A foreclosure would likely not cause significantly more damage
- if he was to stop the foreclosure for the purpose of selling the property, how would he close? The total debt on the property exceeded the sales price – he would walk out of closing owing $10,000 to $20,000
- deficiency judgments arising from foreclosures are rare in Georgia – should the mortgage lender pursue him, we could look at filing a Chapter 7 down the road
- given the current bias against 2nd filings, it is possible that the lender would foreclose in escrow then immediately petition the Bankruptcy Court for an Order validating the foreclosure
- because second cases require extra work – a Motion to Extend the Stay – I have to charge more up front. In this case, the potential debtor was basically telling me that he had no desire or intention to stay in this Chapter 13 for more than a month. As such, I would have to charge $2,500 up front + the filing fee.
- the primary practical problem that the potential client faced – he and his family would have to move fairly quickly
I expressed that in my view, it made little sense to spend thousands of dollars for the hope that he could stay in his house for a few weeks to months. Instead, use his cash reserves to move and find a place to live. I closed by saying that I would file a Chapter 13 for him if he insisted, but that in my view he was wasting his time and money.
Do you agree with my analysis?
Technorati Tags: Chapter 13, pending foreclosure, Georgia foreclosure, foreclosure Fulton County, stop foreclosure, bankruptcy, bankruptcy analysis, re-filed case, motion to extend stay
Filed under Automatic stay issues, Chapter 13 issues, Georgia Bankruptcy by
Having run through several means test calculations over the past few days, it struck me that a lot of the misunderstanding about both the median income test as well as the means test arises from a fundamental misunderstanding in the press and the general public about what the results of a means test really signifies.
The means test, as you may know, involves the creation of a "budget" in which expense categories are limited to acceptable expense figures that are based on IRS derived numbers. For example, under the current tables, IRS tables say that a family of 4 living in Fulton County may spend $1,529 for rent or a mortgage. If the actual mortgage for that family of 4 is $1,900, then for means test purposes $371 (the difference between $1,900 and $1,529) is "disposable" and available to use in a Chapter 13 payment.
If you actually file a Chapter 13, however, you can claim the full $1,900 as your mortgage expense on Schedule J of your budget. For Chapter 13 purposes, your budget must be reasonable and you are subject to the good faith requirements of the Kitchens case at its progeny.
The means test only serves to tell you (1) that Chapter 7 is or is not an option (2) if you have to file a Chapter 13, whether that Chapter 13 can be a 3 year plan or must it be a 5 year plan.
The "disposable income" bottom line of the means test has no correlation with a real life budget that you would actually file in your Chapter 13 case (or Chapter 7 case for that matter). In fact, I would suggest that there is almost no likelihood that your Schedule I & J budget will match your means test budget. I have actually been questioned about this by Chapter 7 trustees and my response has been to advise the trustee that the means test does not reflect a real budget and it was never intended to represent a real budget. There is nothing in the Code to suggest that IRS budget categories should be use on Schedules I & J.
The judges in the Northern District appear to be on board with this understanding. Both Judge Mullins and Judge Massey have ruled that the debtors' actual disposable income controls over the theoretical disposable income as determined by the means test. Presumably this means that a Chapter 13 debtor can qualify for a 3 year plan based on actual disposable income even if the means test budget shows sufficient disposable income to mandate a 5 year plan.
So, recognize the means test for what it is – a qualification tool, but nothing more.
Technorati Tags: means test, median income test, Judge James Massey, Judge C. Ray Mullins, means test in Georgia, means test 11th Circuit
Filed under Georgia Bankruptcy, Means Test issues by
The Georgia Supreme Court recently considered the issue of whether a debtor/ husband could be held in Contempt of Court in Superior Court for refusing to pay a joint marital debt. In the case of McGahee v. Rogers, the trial court denied the contempt motion on the grounds that (1) the debtor/husband had discharged his obligation to pay the debt and (2) because the debts had been discharged, contempt relief was inappropriate.
The Georgia Supreme Court reversed and remanded, holding that (1) the Bankruptcy Court had not specifically ruled on whether this joint debt was in the nature of alimony and support – and therefore non-dischargeable, and (2) that the Superior Court judge had "concurrent" jurisdiction to make this dischargeability determination. The Supreme Court then sent this case back to the Superior Court judge for a dischargeability determination.
What does this mean?
Firstly, it appears that the Georgia Supreme Court is going beyond the question of whether the debtor/husband is liable for contempt. If the Superior Court judge finds that the joint marital debt obligation is in the nature of support/alimony (Bankruptcy Code Section 523(a)(5) debt) then the debtor/husband will still be responsible to pay this debt [for the benefit of his wife] despite the bankruptcy discharge, and can be punished by contempt remedies, including jail, if he does not pay. If the Superior Court judge holds for the wife, it would appear that the husband's financial obligation under the divorce decree remains due and owing.
Second, it re-establishes that the Georgia Superior Court judge has the authority to make a ruling on whether a debt is dischargeable pursuant to the Bankruptcy Code.
Third, it is instructive to note that the applicable Bankruptcy Code used in this case was the pre-October 17, 2005 Code. The October 17 amendments changed both Section 523(a)(5) and (a)(15) to expand the exception to discharge for marital debts. Gone is the "balancing test" of former Code Section 523(a)(15). Under the current Code, it appears that just about every debt arising from a divorce is non-dischargeable. The practical impact of this will be to eliminate the strategy of using a bankruptcy filing to get rid of a divorce related debt.
Finally, as a matter of strategy, I am suggesting to my colleagues in the domestic relations bar that they should specifically include in every divorce settlement agreement a provision that clearly excepts marital debts from bankruptcy discharge. In turn, if the ex-spouse does file bankruptcy it should be very easy to get a quick (and inexpensive) ruling from the Bankruptcy Judge holding that the marital debt is non-dischargeable. Hopefully the net effect of cases like McGahee and the new Code provisions will reduce the need for costly litigation.
Along the same lines, it might make sense for divorcing parties to consider filing a joint bankruptcy prior to the divorce for the purpose of eliminating joint debt and potential problems.
Remember, even if you can hold your ex-spouse in contempt for failing to pay a joint debt, your rights against your ex-spouse have no effect whatsoever on the creditor. The creditor can sue you, garnish your wages and bank accounts – it becomes your problem to force your ex-spouse to make you whole again.
Thanks to Scott Riddle and his Georgia Bankruptcy Blog for highlighting this case.
Technorati Tags: divorce and bankruptcy, georgia bankruptcy, georgia divorce, 523(a)(5), 523(a)(15) debts in the nature of alimony and support
Filed under Divorce and bankruptcy issues, Georgia Bankruptcy by
Florida Attorney Jonathan Alper discusses in his Florida Bankruptcy blog several important considerations if you are thinking about turning to a family member to help you buy a car prior to filing bankruptcy. In a scenario I have seen on occasion, Jonathan describes meeting with a client who had asked his parents to help him buy a car. The parents bought the car, but titled it in the debtor (son's) name and never recorded a lien to secure their loan to the son.
In this situation, the "loan" from the parents is unsecured (no different than a credit card) and, worse, the son cannot include the monthly car payment as a secured debt for means test purposes. For bankruptcy purposes, therefore, this car is owned free and clear by the son/debtor and it counts as an asset.
The big picture point here, I think, is that if you are thinking about filing for bankruptcy, you should never take drastic action like buying or selling a car or house without first speaking to your lawyer. Even if those recent transactions can be reversed, they may still count against you in Bankruptcy Court.
Technorati Tags: family car loans, means test, pre-bankruptcy planning, Chapter 7, Georgia bankruptcy, Georgia Chapter 7
Filed under Georgia Bankruptcy, Means Test issues, Protected property issues by
I received an email today from a potential client asking about the rules for filing a Chapter 13 after a Chapter 7 that has been discharged.
Section 1328 of the Code says that a Chapter 13 debtor my not be granted a discharge if he received a discharge in a Chapter 7, 11 or 12 filed within four years of the filing of the pending Chapter 13 case.
Interestingly, this Code section does not appear to bar the filing of a Chapter 13 case within four years of a Chapter 7 discharge, but a case filed within this four year period would not result in a discharge. My colleague, Scott Riddle, has written in his Georgia Bankruptcy Law blog about two Southern District cases where the Judge found the debtors to be eligible for Chapter 13, despite their ineligibility for a discharge. One of the factors in the two cases Scott writes about is the proposed 100% dividend to unsecured creditors.
What does this mean? Would cases that propose less than a 100% dividend face more judicial scrutiny? Does it mean that a plan that proposes a 10% dividend to unsecureds would pay the 10% dividend in the plan, but not discharge the remaining 90%, which would survive the bankruptcy? What about a 100% dividend plan – would accruing interest survive the close of the Chapter 13 estate? I suspect that we will find out the answers to these questions within the next few years.
Now, what about the percentage dividend to unsecureds in a Chapter 13 filed after a Chapter 7 discharge? I have always used the "best efforts" and "good faith" requirements of the Kitchens case (In re Kitchens, 702 F .2d 885 (11th Cir . 1983).
The Kitchens case sets out a list of factors to be considered in determining good faith:
(1) the amount of the debtor's income from all sources;
(2) the living expenses of the debtor and his dependents 411 U .S .C . §1325(x)
(3) the amount of attorney's fees
Filed under Chapter 13 issues, Georgia Bankruptcy by
My colleague attorney Scott Riddle recently posted on his Georgia Bankruptcy Blog an important reminder to both debtors and their counsel about the importance of full and complete disclosure of assets and debts in bankruptcy petitions.
The last paragraph of Scott's post merits repeating:
The lesson to debtors is, obviously, disclose all of your assets and answer all questions truthfully (truth + fully). You cannot over-disclose to your lawyer or on the schedules. For debtors' counsel, explain the criminal and civil (bankruptcy) penalties for false schedules, and get a signed statement that it has been explained. It can't be good marketing when a client is denied a discharge and gets indicted, especially if the client defends by claiming he/she didn't understand what is supposed to be disclosed.
All of us who represent stressed out and anxious debtors have heard a request that "let's just keep this between the two of us" and a confession about some hidden asset or loan repayment (in cash) to a relative. My response, as would be the response of most of my colleagues in the consumer bankruptcy bar, is to the effect that (1) I am an officer of the Court and I will not participate in a scheme to mislead the bankruptcy court and (2) I am not going to put my livelihood in jeopardy for any client, ever.
In the case discussed in Scott's blog entry, the omitted assets would not have created a problem for the debtor, but the judge or trustee in that case sent the file to the U.S. Attorney for criminal prosecution for Bankruptcy Fraud. Because the debtor intended harm, he committed a crime – and ended up serving time in federal prison.
So, if you are considering bankruptcy, keep in mind this requirement of total and complete disclosure of all information, good, bad or indifferent.
Technorati Tags: bankruptcy disclosure, criminal penalty for bankruptcy fraud, failure to disclose assets in bankruptcy filing
