Michigan Bankruptcy Blog
When an individual files a Chapter 7 bankruptcy case, the debtor’s non-exempt assets become property of the estate that is used to pay creditors. “Property of the estate” is a defined term under the Bankruptcy Code, so a disputed question in many cases is: What assets are, in fact, available to creditors?
Once a Chapter 7 debtor receives a discharge of personal debts, creditors are enjoined from taking action to collect, recover, or offset such debts. However, unlike personal debts, liens held by secured creditors “ride through” bankruptcy. The underlying debt secured by the lien may be extinguished, but as long as the lien is valid it survives the bankruptcy.
One of the objectives of the Bankruptcy Code is to ensure that each class of creditors is treated equally. And one of the ways that is accomplished is to allow the debtor’s estate to claw back certain pre-petition payments made to creditors. Accordingly, creditors of a debtor who files for bankruptcy are often unpleasantly surprised to learn that they may be forced to relinquish “preferential” payments they received before the bankruptcy filing.
In bankruptcy, a debtor must relinquish assets to satisfy debts. But there are exceptions to this general rule. Certain assets may be exempted from a debtor’s bankruptcy under federal and state law. Other assets, which are subject to a contractual loan agreement and the security interest of a lender, may be “reaffirmed” by a debtor pursuant to a reaffirmation agreement. The debtor may keep the asset, such as a house or a car, as long as the debtor enters into a new agreement with the lender that reaffirms the debt according to defined contractual terms, which may or may not track the original loan terms.
The purpose of bankruptcy is to provide for an orderly process by which a debtor’s assets can be fairly divided and distributed among creditors.
On June 4, 2018, the U.S. Supreme Court decided the case of Lamar, Archer & Cofrin, LLP v. Appling, No. 16-1215, which dealt with the dischargeability of debt in bankruptcy proceedings. The Court held that a statement about a single asset can be a “statement respecting the debtor’s financial condition” under section 523(a)(2) of the Bankruptcy Code.
Numerous changes to the Federal Rules of Bankruptcy Procedure (the “Rules”) take effect on December 1, 2017. The changes significantly impact the administration of consumer bankruptcy cases, and Chapter 13 cases in particular.
The United States Bankruptcy Court for the Western District of Michigan recently issued an opinion in a bankruptcy case involving a husband and wife who filed for Chapter 7 bankruptcy protection.
In a recent decision, the Bankruptcy Appellate Panel of the Sixth Circuit (the “Court”) considered the issue of asset “abandonment” in a Chapter 7 case[1]. The Court reversed the bankruptcy court’s decision to allow the Chapter 7 trustee to compromise a claim that the debtor argued the trustee had abandoned.
[1] In re: Wayne L. Wright, Docket No. 16-8019 (6th Cir. BAP, April 17, 2017).
In the case of Susan G. Brown v. Douglas Ellmann [1], the U.S. Court of Appeals for the Sixth Circuit (the “Sixth Circuit”) recently affirmed a bankruptcy court’s decision to deny a Chapter 7 debtor’s proposed exemptions for the value of redemption rights she enjoyed under Michigan law related to the sale of a property she surrendered to the bankruptcy estate.
[1] Case No. 16-1967 (6th Cir., March 20, 2017).
The Bankruptcy Code grants a trustee (or a debtor in possession) certain “avoidance” powers to recover payments to creditors made shortly before a bankruptcy filing where the payment gave the creditor more than other, similarly situated, creditors would receive through the bankruptcy process.
In a recent case in the United States Bankruptcy Court for the Western District of Michigan (the “Court”), the Court considered whether a payment made by a Chapter 7 debtor to her son in advance of the debtor’s bankruptcy filing was “preferential” and thus subject to recovery by the Chapter 7 trustee.
While bankruptcy relief is available as a tool for individuals to discharge debts, it is not available to everyone, under all circumstances. Before a debtor can, for example, discharge debts in a Chapter 7 bankruptcy, he or she must prove that debts and income are within certain statutory thresholds. When determining whether an individual is eligible for relief, the nature of the debts at issue is also relevant.
State unemployment benefits are paid pursuant to a system that relies on trust. Benefits are paid based on representations made by claimants that they are out of work and that they continue to seek out full-time work. If a claimant finds part-time work, then benefits are reduced accordingly.
A recent opinion from the United States Bankruptcy Court for the Western District of Michigan (the “Court”) addresses a Chapter 7 debtor’s attempt to discharge a debt owed to the State of Michigan for overpaid unemployment benefits, and penalties and interest stemming from the overpayment.
The purpose of filing for Chapter 7 bankruptcy is to discharge debts. But even after obtaining a discharge, a debtor is not totally in the clear. A recent case in the United States Bankruptcy Court for the Western District of Michigan involves an adversary proceeding in which the United States Trustee sought to revoke a Chapter 7 debtor’s (the “Debtor”) discharge.[i]
On May 16, the U.S. Supreme Court decided Husky International Electronics, Inc. v. Ritz[1], ruling that the term “actual fraud” in section 523(a)(2)(A) of the Bankruptcy Code includes forms of fraud that do not involve a fraudulent misrepresentation.
In this case, Husky International Electronics, Inc. sold products to and was owed money by Chrysalis Manufacturing Corporation. Daniel Ritz, one of the owners of Chrysalis, transferred money from Chrysalis to other entities that he owned, draining Chrysalis of its assets and making it impossible for Chrysalis to pay its debts owed to Husky and other creditors.
The U.S. Bankruptcy Court for the Eastern District of Michigan recently considered the issue of whether a Chapter 7 trustee may bring a cause of action against a debtor for damages caused to the bankruptcy estate by the debtor’s alleged failure to comply with the debtor’s duties under section 521 of the Bankruptcy Code. Under the circumstances, the court held that no private cause of action existed and thus ruled in favor of the debtor on the issue.[1]
In a recent case, a lawyer was sanctioned by an Ohio bankruptcy judge for his conduct in connection with an adversary proceeding he brought on behalf of a client against a Chapter 7 debtor. The lawyer was vindicated, though, after the Bankruptcy Appellate Panel of the Sixth Circuit (the “BAP”) reversed the bankruptcy court on appeal.
Bankruptcy is a process that permits people to discharge debts, but not all debts are dischargeable. In a recent opinion, the U.S. District Court for the Eastern District of Michigan (the “District Court”) reversed a U.S. Bankruptcy Court for the Eastern District of Michigan (the “Bankruptcy Court”) ruling that a state court criminal restitution claim is dischargeable.
In the Summer of 2014, we wrote about a Chapter 7 bankruptcy case in the U.S. Bankruptcy Court for the Western District of Michigan (the “Bankruptcy Court”) involving an intra-family squabble. Our analysis focused on the Bankruptcy Court’s decision related to cross motions for summary judgment filed by the parties, and whether the doctrine of “collateral estoppel ”was applicable to the claims being asserted by the parties in an adversary proceeding pending in the bankruptcy.
While bankruptcy offers a fresh start to debtors, it’s not always a fast fresh start, as evidenced by the fact that the Bankruptcy Court recently published another opinion in the same adversary proceeding relating to a similar claim and again analyzing the applicability of collateral estoppel.
Students have taken on more than $1 trillion in debt to pay for the relentlessly rising costs of higher education. With that much debt outstanding, it’s no surprise that there are increasing numbers of borrowers defaulting on student loan debt, and seeking to discharge that debt by filing for bankruptcy protection. But, as a Wisconsin man recently learned, discharging student loan debt in bankruptcy is no easy feat.
The scope and extent of debts that may be discharged is an often litigated issue in bankruptcy. In a recent Chapter 13 case in the U.S. Bankruptcy Court for the Eastern District of Michigan, the bankruptcy court considered whether an otherwise dischargeable government penalty debt is nondischargeable if the debt arises from fraud.[1]
All is not lost when a debtor files Chapter 7 Bankruptcy. On September 22, attorneys Patricia Scott and Scott Chernich presented a webinar titled "Collect Your Money in Bankruptcy: Chapter 7." In addition to teaching the ins and outs of how to collect money and assets in a Chapter 7, they discussed the basics of a Chapter 7, motions for relief from stay, co-debtor stay, non-dischargeable claims, and other topics to efficiently and effectively obtain what is rightfully yours in a bankruptcy.
To watch this webinar view the recording on our YouTube channel here.
Upcoming Webinar Series: Collect Your Money in Bankruptcy
Attorneys Scott Chernich and Patricia Scott will be presenting a FREE webinar series this fall titled “Collect Your Money in Bankruptcy.” This three-part series will cover what to do as a creditor if you receive a bankruptcy notice in a Chapter 7, Chapter 11 or Chapter 13 bankruptcy.
Sixth Circuit Affirms Bankruptcy Court Order Allowing Amended Exemptions Following Re-Opening of Case
In a Chapter 7 bankruptcy case, a debtor is required to file a schedule listing all of the debtor’s property. This includes cash, hard assets such as furniture and cars, as well as intangibles such as causes of action or potential causes of action. The Bankruptcy Code allows debtors to “exempt” certain types of property from the estate, enabling them to retain exempted assets post-bankruptcy.
In a recent opinion, the U.S. Court of Appeals for the Sixth Circuit analyzed the limits of a bankruptcy court’s authority to disallow claimed exemptions.
On June 1, 2015, the United States Supreme Court decided Bank of America v. Caulkett, No. 13-1421, together with Bank of America v. Toledo-Cardona, No. 14-163, holding unanimously that a Chapter 7 bankruptcy debtor cannot “strip off” a junior lien.
Lien stripping takes place when there are two or more liens on a property, and the senior lien is “underwater” in that the amount owed on the senior lien is greater than the value of the property. In a Chapter 13 case a property owner can strip off the junior lien, resulting in it being treated as unsecured debt in the bankruptcy.
In these cases, the Court held that a Chapter 7 debtor may not void a junior lien under 11 U.S.C. § 506(d) when the debt owed on a senior lien exceeds the current value of the collateral if the junior creditor’s claim is both secured by a lien and allowed under § 502 of the Bankruptcy Code.
When an individual contemplates filing for bankruptcy protection, he or she has a few options. One is to file a Chapter 7 case, and another is to file a Chapter 13 case. In a Chapter 7, all of a debtor’s non-exempt assets are transferred to a bankruptcy estate to be liquidated and distributed to creditors. In a Chapter 13, the debtor retains assets and makes payments to creditors according to a court-approved plan.
Check out this webinar on our YouTube channel to identify common mistakes that lenders make before and during consumer bankruptcy cases – and how to avoid those mistakes to better protect the lender's rights and collateral.
In litigation, obtaining a judgment is step one. Step two – often as, if not more, difficult than winning a lawsuit – is collection. In a short, interesting Memorandum of Decision and Order (the “Decision”), Judge Dales of the United States Bankruptcy Court for the Western District of Michigan (the “Bankruptcy Court”), writes about some of the practical and legal considerations involved with pursuing collection of a bankruptcy court judgment.
There has been much discussion in the media in the past year about the massive amount of professional fees that have been wracked up during the City of Detroit's Chapter 9 bankruptcy. There is always great interest - and debate - about such fees due to the nature of the process: insolvent individuals or companies with no place left to turn file for bankruptcy, creditors take a "haircut" on their claims, and the lawyers get paid. Or so the story goes. As with any complex process, though, there is plenty of nuance that gets lost in the wash, and often is more to the story.
While Chapter 7 bankruptcy offers individuals a fresh start and discharge from many debts, it doesn't come without a price. Property of the debtor becomes property of the estate and is used to pay creditors.
But not all of it. Section 522 of the Bankruptcy Code lists exemptions that debtors can use to exempt property - up to a certain dollar amount in value - from the estate. The purpose of exemptions is to ensure that the individual debtor is able to maintain a basic standard of living post-bankruptcy. But because there are very few assets available for creditor recovery beyond exempt property in many bankruptcy cases, the propriety of a debtor's claimed exemptions is an issue that is oft-litigated.
Such was the case in an appeal to the U.S. Court of Appeals for the Sixth Circuit (the "Sixth Circuit") arising from a Chapter 7 bankruptcy case that was filed in the U.S. Bankruptcy Court for the Eastern District of Michigan.
From Ponzi schemes to fraudulent transfers, many Chapter 7 bankruptcy cases involve allegations of wrongdoing. Bankruptcy trustees, who stand in the shoes of the bankrupt entity in asserting claims, often bring actions against third parties alleging participation in, and orchestration of, fraudulent schemes. Because the alleged wrongdoing many times involves actions or transactions in which the debtor took part, defendants in such lawsuits frequently raise a defense based on the doctrine of in pari delicto.
Two of the most difficult and stressful legal processes that individuals participate in are divorce and bankruptcy proceedings. Unfortunately, as lives are upturned and finances stretched, one often closely follows the other.
Such was the case in a recent case in the United States Bankruptcy Court for the Western District of Michigan.
A husband and wife (both Michigan residents) used equity from property owned by the wife - prior to and during the marriage - to finance a roofing repair business started by the husband in Florida. To accomplish this, the wife quit-claimed her interest in the property to herself and the husband. They then refinanced the property and borrowed $200,000 from the lender. The loan funds were used to pay off the wife's original mortgage on the property ($120,000), pay down the husband's credit card debt and fund the new business.
They then agreed that the husband would make monthly mortgage payments on the new loan until the payments equaled the amount of the original mortgage - $120,000. They subsequently refinanced the loan with two new lenders. Shortly thereafter the husband's business failed, and the husband and wife started divorce proceedings in 2011.
On Monday, November 17, 2014, the U.S. Supreme Court agreed to hear two bankruptcy-related cases that involve issues commonly faced by banks and homeowners with underwater mortgages in Chapter 7 cases. The cases of Bank of America v. Caulkett and Bank of America v. Toledo-Cardona come from Florida, where many homeowners own homes with mortgages that exceed equity value due to the recent housing crisis. Bank of America holds the second mortgage in both cases.
The financial and housing crisis that began in 2008 led to a huge wave of foreclosures and foreclosure-related litigation. While foreclosure is rooted in state law, the initiation of a foreclosure proceeding by a lender often leads to federal bankruptcy proceedings initiated by a borrower, giving rise to interesting legal issues involving the interplay of state foreclosure law and federal bankruptcy law. Recently, the U.S. Court of Appeals for the Sixth Circuit (the "Sixth Circuit") considered the implications of a foreclosure on a residence following the borrowers' Chapter 7 bankruptcy proceeding.[1]
When someone files for bankruptcy, an estate is created that consists of, among other things, any and all assets owned by, or to which the debtor filing the bankruptcy case has a right to or interest in. This includes tangible things such as real estate, vehicles, money, clothing, and jewelry, as well as rights to property such as litigation claims.
In a Chapter 7 case, all assets belong to the trustee on the date a case is filed unless an exemption is claimed, and the trustee gets to keep, sell or otherwise administer assets for the benefit of creditors.
When it comes to determining "property of the estate," timing is important. Generally speaking, a debtor gets to retain property acquired after the bankruptcy filing occurs.
Many students don't realize the scope and extent of the lifelong financial burden they saddle themselves with when taking out student loans. It is only after getting into the "real world" that they realize that living expenses are higher, and after tax income is lower, than they anticipated, making student loan debt repayment difficult if not impossible.
Some look to bankruptcy for relief and a fresh start. But all debt is not treated equally in bankruptcy. Student loan debt is not the same as, for instance, credit card debt. It is not dischargeable pursuant to Bankruptcy Code section 523(a)(8) except in one narrow circumstance. Specifically, to discharge student loan debt, a debtor must show undue hardship - a very high bar.
Lien stripping is a process that involves eliminating junior liens (such as a second mortgage) through the bankruptcy process. In a recent appeal to a Sixth Circuit Bankruptcy Appellate Panel ("BAP"), the BAP overturned a bankruptcy court's denial of a Chapter 13 debtor's motion to avoid the lien of an inferior mortgage lien holder.
When a debtor files for bankruptcy, it is principally to obtain a fresh start and discharge of debts from creditors. But not all debts are dischargeable. The Bankruptcy Code lists 19 categories of nondischargeable debts, which Congress has determined are not dischargeable for public policy reasons.
Some debts are always nondischargeable, including certain taxes, child support, and court fines and penalties, to name a few. Others are not deemed automatically excepted from discharge, but can be when challenged by creditors. When a case is filed, bankruptcy courts set a deadline for creditors to raise nondischargeability issues, and creditors who wish to except a debt from discharge must initiate an adversary proceeding (by filing a complaint) setting forth the basis for the discharge objection. These types of debts include those obtained by fraud or false pretenses and those resulting from a tort, among others.
Issues related to the nondischargeability of a debt in a Chapter 7 bankruptcy were recently examined by the United States Bankruptcy Court for the Western District of Michigan. In the case, Trost v. Trost, Sherry Trost, the plaintiff, sought to except from discharge debt owed by the debtors (her stepson Zachary and his wife Kimberly) to her. The debt related to an ownership dispute involving videotapes and other memorabilia from a television show, Michigan Outdoors, that was created and operated by Fred Trost, Sherry's late husband and Zachary's father. Sherry alleged that she became the owner of these assets after Fred died, and that the debtors/defendants converted the property to their own use.
In Law v. Siegel, a case decided by the U.S. Supreme Court in March, the Court unanimously ruled that the bankruptcy court exceeded its authority when it surcharged the debtor’s homestead exemption to pay the Chapter 7 Trustee’s attorney fees, despite the debtor’s misconduct.
The case involved Stephen Law, a consumer debtor who filed for Chapter 7 bankruptcy in California. Law's only significant asset was his house, worth approximately $360,000. Law exempted $75,000 of the home equity under the state homestead exemption. Law further claimed that there was no additional equity in the house because it was subject to two mortgages totaling up to more than $300,000 — more than the nonexempt value of the house. The first mortgage was real. The second mortgage, allegedly in favor of "Lin's Mortgage & Associates,” was fake. Law was perpetrating a fraud. Alfred Siegel, the Chapter 7 Trustee, uncovered the mortgage scam. Unfortunately, in the process, the trustee incurred approximately $500,000 in legal fees.
A recent decision in the U.S. Bankruptcy Court for the Western District of Michigan[1] granted a Motion filed by the Chapter 7 Trustee requesting turnover by the debtor of proceeds of a life insurance policy that were used by the debtor to pay the burial expenses of her father.
In the case, the Chapter 7 Trustee filed a Motion to Compel Turnover of Non-Exempt Assets seeking $9,698.90 from the debtor, including non-exempt cash, jewelry, a whole life insurance policy, and the proceeds from an insurance policy on her father's life. The debtor disputed that she was required to turn over the $7,208.84 in life insurance on her father's life, who died two days after her bankruptcy filing. The debtor argued that she used the proceeds to pay for her father's burial, and that she was not a beneficiary of the policy, but rather the owner.
Baldridge v. Douglas Stanley Ellmann (In re Baldridge), Appeal No. 13-1700 (6th Cir., Feb. 3, 2014).
On appeal from the District Court for the Eastern District of Michigan, the Sixth Circuit held that a $28,000 “carve out” recovered by the Chapter 7 Trustee pursuant to 11 U.S.C. § 506(c) after closing a sale on the debtors’ property was not property of the estate that could be subject to the debtors’ exemption because the property was over encumbered by two mortgages, leaving no equity for the debtors to exempt.
Section 110 of the United States Bankruptcy Code provides that a non-attorney can assist in the preparation of the bankruptcy petition. However, as an Inkster, Michigan man just learned (the hard way), the Bankruptcy Code places numerous requirements on bankruptcy petition preparers and subjects those who do not comply to substantial penalties.
On Tuesday, February 25, Derrick Hills of Inkster was sentenced by U.S. District Court Judge Sean F. Cox to 46 months in prison after being convicted by a jury in September of five counts of criminal contempt. The contempt proceedings stemmed from repeated violations of orders issued by U.S. Bankruptcy Judge Steven Rhodes from 2007 to 2009. According to a press release issued by the U.S. Attorney's Office following Hills' conviction at trial:
The evidence presented at trial showed that Hills had acted as a bankruptcy petition preparer since 2007, assisting people in filing for bankruptcy. Hills continued to act as a bankruptcy petition preparer despite five bankruptcy court orders issued by Bankruptcy Judge Steven Rhodes, permanently enjoining Hills from doing so for various non-compliance with bankruptcy rules and complications caused by his acting in the capacity of a bankruptcy petition preparer. Hills assisted individuals with consumer debts in preparing and filing their Chapter 7 bankruptcy paperwork. However, his actions went well beyond what was allowed by law and clearly violated Judge Rhodes Orders.
In re Newcomb Print Communications, Inc., Case No. 12-08042 (Bankr. W.D. Mich., Sept. 6, 2013).
When a debtor files a case under Chapter 11 and retains legal counsel, another person or entity may fund the debtor’s retainer. But even when the debtor is not the source of the funds, the retainer is property of the bankruptcy estate – which is particularly important if the case later converts to Chapter 7.
In re Casey Marie Anthony, Bankr. M.D. Fla., Case No. 8:13-bk-00922-KRM
Although this blog typically focuses on Michigan bankruptcy cases, last week’s Chapter 7 filing by Casey Anthony raises interesting questions about the impact of bankruptcy on public figures.
Casey Anthony held the national spotlight for nearly three years after being charged with murdering her two-year-old daughter, Caylee. Anthony initially alleged that Caylee was kidnapped by her nanny, then claimed that Caylee accidentally drowned in the family pool. After a jury found her not guilty on all charges except some misdemeanors, Anthony faced a barrage of lawsuits, including claims for defamation and for reimbursement by private investigators who searched for Caylee in the months before her remains were found.
Those lawsuits ground to a halt when Anthony filed a voluntary Chapter 7 petition in the Middle District of Florida on January 25, 2013. In her bankruptcy papers, Anthony lists few assets (comprised mostly of household goods) but discloses unsecured debts of nearly $800,000, plus numerous debts of unknown amounts. The debts include the pending lawsuits against her and $500,000 in legal fees owed to her criminal defense attorney.
Auday v. Wet Seal Retail, Inc., Case No. 12-5057 (6th Cir., Oct. 25, 2012) (recommended for full-text publication).
As most bankruptcy practitioners know, a debtor’s pre-petition cause of action – whether for personal injury, breach of contract, or other claim – is property of the bankruptcy estate. Now, the Sixth Circuit has clarified that only the trustee can file suit in connection with a Chapter 7 debtor’s pre-petition cause of action, unless the action is abandoned.
Moyer v Koster et al (In re Przybysz), Adv. Pro. Case No. 12-80174 (Hon. Scott W. Dales, Sept. 25, 2012).
A recent decision from the Bankruptcy Court of the Western District of Michigan serves as a lesson and reminder to attorneys that complaints must do more than recite legal conclusions – they also must allege sufficient facts to put defendants on notice of the claims and of possible defenses.
This blog entry includes material originally prepared by the author for the 2012 FBA Bankruptcy Seminar.
The U.S. Supreme Court’s decision in Stern v. Marshall, 131 S. Ct. 2594 (2011), immediately cast a shadow of uncertainty on bankruptcy courts’ constitutional authority to enter final orders. But Stern leaves many questions unanswered, and the bankruptcy judges within the Western District of Michigan have differed as to whether the case should be interpreted narrowly or broadly. As a result, depending on the presiding judge in a particular case, Stern may be critically important or unworthy of mentioning. The following is a brief review of cases in this district that address the scope of Stern.
In re Hopkins, Bankr. W.D. Mich., Case No. 10-13592, Hon. Scott W. Dales (Feb. 2, 2012).
When the sole member of a limited liability company files Chapter 7 bankruptcy, the membership interest is property of the bankruptcy estate that the trustee may liquidate, subject to claimed exemptions and liens. But if the LLC owns property, can the trustee also liquidate that property for the benefit of the sole member's creditors?
In re Pellegrini, Bankr. W.D. Mich., Case No. 09-90464, Hon. James D. Gregg (Jan. 17, 2012).
When Congress adopted BAPCPA, it added an exemption for "[r]etirement funds to the extent that those funds are in a fund or account that is exempt from taxation" under certain provisions of the Internal Revenue Code. 11 U.S.C. § 522(d)(12). Although broader than the exemption previously available for retirement funds, § 522(d)(12) is not limitless – as the Bankruptcy Court for the Western District of Michigan recently emphasized.
Effective December 1, 2011, the Federal Rules of Bankruptcy Procedure (FRBP) that govern filing a proof of claim will change dramatically.
FRBP 3001 will be amended to increase the types of information required to be attached to a proof of claim. While Rule 3001 has always required a claimant to produce a writing to support its claim, now a claimant must also attach information relative to the principal, interest, fees, and any other expenses incurred pre-petition - including arrearages.
Richardson v. Citimortgage, Inc. (In re Emerson), unpublished opinion, BAP No. 11-8015 (Oct. 7, 2011).
The Bankruptcy Appellate Panel of the Sixth Circuit ("BAP") has rejected a trustee's efforts to avoid a mortgage that was mistakenly discharged because the discharge was rescinded before the debtor's bankruptcy filing.
In re Rahim, E.D. Mich., May 23, 2011 (Case No. 10-15123, Hon. Sean F. Cox).
Previously on this blog, we discussed In re Rahim, a case in which Judge Rhodes dismissed the Chapter 7 case of debtors with primarily non-consumer debts "for cause" under 11 U.S.C. § 707(a) because the case was not filed in good faith. The debtors, both practicing physicians, brought home an annual income of more than $500,000 and had multiple homes and luxury vehicles.
Johnson v CACH, LLC (In re Johnson), E.D. Mich., December 20, 2010 (Case No. 10-12873, Hon. Robert H. Cleland)
When a creditor has a state court judgment, garnishing the judgment debtor's state income tax refund is a common collection method. If the judgment debtor files bankruptcy, issues often arise as to whether the creditor can keep the refund or whether the debtor is entitled to recover and exempt the refund.
In the "Did You Know?" section of the Michigan Bankruptcy Blog, we feature opinions that are not newly issued but that may be helpful for Michigan bankruptcy practitioners.
When a person files bankruptcy, most collection actions are automatically stayed. Subject to certain exceptions, Section 362 of the Bankruptcy Code prohibits the commencement or continuation of an action to recover a pre-petition claim, the enforcement of a pre-petition judgment, and any act to collect a pre-petition claim against the debtor, among other things.
In re Zerbi, Bankr. W.D. Mich., Jan. 6, 2011 (Case No. 09-14649, Hon. Scott W. Dales)
A recent decision from the Bankruptcy Court for the Western District of Michigan provides some practical guidance for debtors and their attorneys about exempting unmatured life insurance policies.
In In re Zerbi, the debtor owned and was the insured under a life insurance policy. The policy had both a "cash value" or investment component and an insurance component. When the debtor filed his Chapter 7 case, the insurance policy had a cash surrender value of approximately $19,248.02. The debtor claimed exemptions in the policy under sections 522(d)(5) (the "wildcard" exemption), 522(d)(7), and 522(d)(8):
In re O'Brien, Bankr. W.D. Mich., Jan. 4, 2011 (Case No. 09-00426, Hon. James D. Gregg).
As previously discussed on this blog, debtors should include a good-faith estimate of an anticipated tax refund in their bankruptcy schedules. In prior cases, the Hon. Jeffrey R. Hughes and the Hon. Scott W. Dales suggested that debtors may not be able to amend their schedules to exempt tax refunds that have already been spent at the time of the amendment. But in a recent opinion, the Hon. James D. Gregg disagreed with those cases and held that, depending on the circumstances, debtors may be able to exempt a tax refund that was not originally disclosed, even if the tax refund has been spent.
In re Rahim, Bankr. E.D. Mich., Dec. 16, 2010 (Case No. 10-57577-R, Hon. Steven Rhodes).
When one thinks of Chapter 7 bankruptcy cases, the low-income consumer debtor who is overwhelmed by debt often comes to mind. But individuals whose debts are primarily "non-consumer" debts – usually business debts – may also qualify for Chapter 7 relief, even if they cannot pass the "means test" required for consumer debtors under BAPCPA. Because business debtors do not have to pass the means test, their incomes may be significantly higher than what one might expect to see in a Chapter 7 case. However, at least one Michigan bankruptcy court is requiring high-income business debtors to tighten their belts when they seek Chapter 7 relief.
In In re Rahim, the married debtors, both practicing physicians, earned a startlingly high income. Despite having filed Chapter 7, the debtors' annual income exceeded $500,000, and their expenses included sizeable mortgage payments on their home, vacation home, and rental home, plus payments on three luxury vehicles. Their debts included numerous mortgages and personal guaranty liability arising out of failed real estate ventures.
Although less sweeping than the 2009 rule amendments, which changed the time periods for many actions, bankruptcy professionals should take note of the most recent changes to the Bankruptcy Rules.
Notably, Amended Rule 1007(c) increases the time for an individual debtor in Chapter 7 to file the statement of completion of a course concerning personal financial management from 45 days to 60 days.
Richardson v. Wells Fargo Home Mortgage, Inc. (In re Brandt), Bankr. W.D. Mich., Nov. 30, 2009 (Adv. Pro. No. 08-80342, 421 B.R. 426, Hon. James D. Gregg), affirmed, W.D. Mich., Aug. 25, 2010 (Case No. 1:10-CV-55, Hon. Robert Holmes Bell).
Outside of bankruptcy, errors in legal descriptions in mortgages often can be corrected. But when a mortgagee files a Chapter 7 bankruptcy case, a mistake in a legal description can open the door for a trustee to avoid the mortgage and potentially liquidate the property for the benefit of the debtor's unsecured creditors.
In re Reiman, Bankr. E.D. Mich., July 16, 2010 (Case No. 09-70776, Hon. Phillip J. Shefferly).
Because of the high volume of foreclosures in Michigan, some lenders are bidding less than fair market value at foreclosure sales, particularly on the east side of the state. This has created a conundrum for Chapter 7 trustees who close cases as "no asset" cases, only to discover after the foreclosure sale that they could have sold the property at market value, paid the redemption amount, and still had money remaining to distribute to unsecured creditors.
In re Hillenbrand, Bankr. E.D. Mich., Feb. 4, 2010 (Case No. 09-75574, Hon. Steven Rhodes).
Although the commencement of a bankruptcy case usually stays a pending state court action against the debtor, a recent decision of the Bankruptcy Court for the Eastern District of Michigan concluded that the stay does not preclude an action seeking an injunction.
In re Neal, Bankr. E.D. Mich., Feb. 8, 2010 (Case No. 08-57254, Hon. Steven Rhodes).
In this case, the chapter 7 debtors claimed an exemption in their house, which was also subject to an unperfected mortgage. The trustee commenced an adversary proceeding, and the court set aside the mortgage. The trustee then tried to sell the house, but the debtors allegedly failed to cooperate with the trustee and refused to vacate the house.
In re Trudell, Bankr. W.D. Mich., Feb. 19, 2010 (Case No. 09-00340. Hon. Jeffrey R. Hughes).
Attorneys for bankruptcy debtors have a duty under the Bankruptcy Code to ensure that the information in the debtors' schedules is accurate. A recent decision from the Bankruptcy Court for the Western District of Michigan cautions debtors' attorneys that this duty extends to the disclosure of anticipated income tax refunds.
When the chapter 7 debtors filed their schedules, they indicated that they did not expect to receive an income tax refund. Several weeks later, the debtors filed their tax return, which showed that they were entitled to a $5,000 refund. The debtors subsequently amended their schedules to disclose the refund and to fully exempt it. Thereafter, the debtors spent their refund.
In re Caperton, Bankr. W.D. Mich., Dec. 21, 2009 (Case No. 09-09540, Hon. Scott W. Dales).
The Bankruptcy Court for the Western District of Michigan recently rejected a debtor's attempt to exempt property based on a provision of the state constitution. The chapter 7 debtor elected to rely on state exemptions and, in addition to those statutory exemptions, claimed an exemption in $750 in personal property under Article X, § 3 of the Michigan Constitution ("Section 3"). Section 3 provides in part that "personal property of every resident of this state in the amount of not less than $750, as defined by law, shall be exempt from forced sale on execution or other process of any court."
