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?

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.

Many bankruptcy cases involve adversary proceedings in which creditors seek to have certain debts deemed nondischargeable. The United States District Court for the Eastern District of Michigan (the “District Court”) recently considered, on appeal, whether the Bankruptcy Court properly held that a debt owed by a debtor (the “Debtor”) to the State of Michigan Unemployment Insurance Agency (the “Agency”) is dischargeable in a Chapter 13 case.¹

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.

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]

Bankruptcy is all about the debtor’s assets, specifically how many and who gets them. The reason that many bankruptcy cases are contentious is that the parties often disagree about the amount of assets available for distribution to creditors, as well as how the assets should be divvied up.

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.

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]

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]

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.

Effective May 1, 2013, the Bankruptcy Courts for the Western and Eastern Districts of Michigan will begin charging a new fee of $25 for each claim transferred. The purpose of the fee, as stated by the Judicial Conference Committee, relates to the number of claims transferred and the impact they have on the workload of the Bankruptcy Courts, including Court time and resources.

The fee will be assessed upon the filing of the claim transfer, regardless of who files the claim transfer. The $25 fee will be charged for each individual claim transfer, and it will also apply to partial claims transfers.

In a recent Opinion, Judge Opperman from the Eastern District of Michigan Bankruptcy Court held that a Chapter 13 debtor cannot exclude voluntary post-petition retirement contributions from disposable income.  This Opinion is significant for debtors, trustees, and creditors as it systematically changes the way the Eastern District of Michigan will treat post-petition voluntary retirement contributions in a Chapter 13.

The Eastern District of Michigan Bankruptcy Court recently held that a debtor can exempt an inherited IRA under 11 U.S.C. § 522(d)(12).

The Eastern District Bankruptcy Court denied the Trustee's objection to an exemption claimed pursuant to § 522(d)(12) by a debtor in IRAs that she had inherited from her father.  The Court further rejected the Trustee's argument that inherited IRA funds cannot be considered "retirement funds" under § 522(d)(12) because the funds were not contributed to the IRA by the debtor.  Rather, the Court adopted the debtor's reasoning that the explicit language of § 522(d)(12) does not make a distinction between "inherited IRAs" and IRAs to which the debtor made the contributions.

Creditors who wish to object to the dischargeability of a debt must follow strict deadlines - and as one recent case illustrates, creditors cannot rely on an extension of those deadlines that is agreed upon by the debtor and the trustee.

In Five Star Laser, Inc., the District Court for the Eastern District of Michigan upheld Judge Rhodes' decision granting a debtor's motion to dismiss a nondischargeability complaint as untimely and holding that a stipulation entered into by the debtor and the bankruptcy trustee to extend the deadline for filing a nondischargeability complaint applied to the trustee only.

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.

Often in bankruptcy cases involving a debtor with a non-filing spouse, the presumption of equal ownership arises.  Subject to certain exclusions, Section 541 of the Bankruptcy Code provides that all property in which the debtor has a legal or equitable ownership interest becomes property of the estate at the commencement of the case.  This includes property the debtor owns with a non-filing spouse.  In some situations, particularly if the debtor does not have an exemption available, the debtor will try to rebut the presumption of equal ownership.

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 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.

In re Olsen, E.D. Mich., Oct. 27, 2010 (Case No. 10-10926, Hon. Stephen J. Murphy, III, District Judge).

When a person files bankruptcy, all of his or her property becomes property of the bankruptcy estate. This concept of "property of the estate" casts a wide net and includes all of the bankruptcy debtor's legal and equitable interests in property. However, questions often arise when a debtor is listed as an owner of an asset that someone else purchased. In such cases, the debtor might argue that he or she is not the "true," or equitable, owner of the property and that the property therefore cannot be used to pay creditors.

In In re Olsen, the debtor's husband, who did not file bankruptcy, was in a motorcycle accident. He settled a claim for his personal injuries and used the settlement funds to purchase an annuity. He and his wife, the debtor, were listed as co-owners and co-annuitants, and both were entitled to receive payments under the annuity.

In re Lipa, E.D. Mich., Aug. 17, 2010 (Case No. 04-74608, Hon. Steven Rhodes).

In re Weeks, W.D. Mich., Jan. 23, 2009 (Case No. 05-02298, 400 B.R. 117, Hon. Jeffrey R. Hughes).

It is not uncommon for debtors - particularly those who own businesses - to sign personal guaranties before their bankruptcy filing. Pre-petition obligations under those guaranties are generally discharged in bankruptcy. But when a post-petition obligation arises under such a guaranty, the Bankruptcy Courts for the Western and Eastern Districts of Michigan are divided as to whether a guarantor-debtor is protected by his or her discharge.

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 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.