Bankruptcy Toolkit for General Practitioners SOURCES OF BANKRUPTCY LAW. 3/12/2012. March 14, 2012

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1 Bankruptcy Toolkit for General Practitioners March 14, 2012 Gloria Z. Nagler William F. Malaier, Jr. Nagler & Associates SOURCES OF BANKRUPTCY LAW The Bankruptcy Code - Title 11 of the United States Code Federal Rules of Bankruptcy Procedure Local Bankruptcy Rules 1

2 TYPES OF BANKRUPTCY Chapter 7: Liquidation Chapter 9: Bankruptcy of Municipality Chapter 11: Reorganization or Liquidation for Businesses and Individuals Chapter 12: Bankruptcy for Family Farmers Chapter 13: Individual Wage- Earner Plan 2

3 Chapter 15 Cross-border Insolvency TIME BETWEEN FILING BANKRUPTCIES 1328: Must wait 4 years from previous discharge in Chapter 7, 11, 12 to file Chapter 13, OR Must wait 2 years from previous Chapter (a): Must wait 8 years from previous discharge in Chapter 7 or 11 to file Chapter 7 3

4 If need Chapter 13 just to have time to cure arrearage, though, can file Chapter 13 anytime: may not get discharge, but will save home CHAPTER 7: STRAIGHT LIQUIDATION BANKRUPTCY Most are no asset in Western District Filing fee: $ Can apply to pay filing fee in installments or apply for fee waiver CREDIT COUNSELING AND DEBTOR EDUCATION 109(h): Debtor must get credit counselling from approved agency (certified by U.S. Trustee) within 180 days before filing bankruptcy 4

5 727(a) & 1328(g): No discharge until debtors complete approved financial education program (certified by U.S. Trustee) VOLUNTARY PETITION FOR MOST CHAPTER 7 CASES Involuntary Petition can be filed by creditors If less than 12 creditors, by 1 with minimum claim of $14, If 12 or more creditors, by 3 or more creditors with aggregate claims of $14,425 5

6 Panel trustee appointed on rotating basis Discharge for individuals, not for corporations MEANS TESTING AS THRESHOLD TO FILING CHAPTER 7 Presumption in favor or Debtor is eliminated and instead there is rebuttable presumption that filing is abusive if Debtor s income exceeds median income. Median Income : Median income as of November 2011 for 4-person family is: Oregon: $66, Washington: $80,

7 Calculate monthly income during last 6 months before filing. Then multiply times 12. If that figure is lower that Median Income for Washington, then no means test analysis and debtor presumptively qualifies to file Chapter 7. RESULTS: If disposable income under $109.50, Debtor passes muster. If disposable income over $ Debtor fails test. If in between, debtor fails if disposable income X 60 would pay 25% of general unsecured debt. If more than 50% of total debt is business-related debt, not consumer Debt, then debtor s income is not material. 7

8 Qualifying for Chapter 13: Maximum Debt Limits: Secured debt: $1,081,400 Unsecured debt: $360,475 WHERE CHAPTER 13 PREFERABLE TO CHAPTER 7 Foreclosure of real property Chapter 7 gives only temporary delay Chapter 13 gives 36 to 60 months to cure arrearage In some cases without interest Modification of debt secured by residence 1322(b)(2) Only if there is other collateral If debtor cannot cure, may sell home in Chapter 13 Must make adequate protection payments (mortgage payments) 8

9 Orderly liquidation of assets Chapter 7 can result in lower proceeds In Chapter 13, debtor can control sale Tax Debt: In Chapter 13 priority tax debt is paid ahead of non-priority debt. In many cases, little or nothing will be paid to non-priority debt. EXCEPTIONS TO STAY RE: DISSOLUTION ISSUES Under 362(b)(2) automatic stay does not apply to: Establishment of paternity Establishment or modification of order for domestic support 9

10 Action concerning child custody or visitation Dissolution of marriage, except for division of property of estate Action regarding domestic violence Collection of support from property not property of estate Withholding of income that is property of estate or of debtor for support under judicial or administrative order or statute NONDISCHARGEABLE CHAPTER 7 DEBT - 11 U.S.C. 523(a) Automatically Nondischargeable: Taxes (3 years old or less, unfiled returns, late-filed returns if less than 2 years ago, tax fraud) Maintenance, child support 10

11 Unscheduled debt: Except that, in a no-asset Chapter 7 in the Ninth Circuit, debt will be discharged even without notice (unless creditor has basis for challenge to discharge). Government fine (unless compensation for actual pecuniary loss) Student loans: Unless debtor can prove undue hardship. 11

12 Death or personal injury related to driving while impaired Certain postpetition condo assessments where debtor resided in condo postpetition OR Tenant resided there and paid rent to debtor Restitution 12

13 Certain debts arising from separation or divorce The following are not automatic; creditor must commence adversary proceeding: Willful and malicious injury Fraud or defalcation of fiduciary, or embezzlement or larceny 13

14 Or debt for money or credit obtained by false pretenses, false representation or actual fraud CHAPTER 7 FOR BUSINESSES FOR LIQUIDATION ONLY, NOT REORGANIZATION CHAPTER 7 TRUSTEE CAN CONTINUE TO OPERATE BUT NEEDS COURT AUTHORITY & OPERATES ONLY LONG ENOUGH TO SELL DISCHARGE OF DEBTS IN CHAPTER 7 NOT AVAILABLE TO CORPORATIONS, LLCS, ETC. DISCHARGE ONLY FOR INDIVIDUALS 14

15 EXEMPTIONS OF ASSETS IN CHAPTER 7 NOT AVAILABLE TO CORPORATIONS, LLCS, ETC. PREFERENCE AND FRAUDULENT TRANSFER RECOVERY TRUSTEE EXAMINES RECORDS FOR 547 AND 548 TRANSFERS PREFERENCES: 547 PAYMENT ON ANTECEDENT DEBT RECEIVED MORE THAN WOULD IN CHAPTER 7 15

16 WITHIN 90 DAYS FOR NON- INSIDERS WITHIN 1 YEAR FOR INSIDERS 548: FRAUDULENT TRANSFERS 2-YEAR LOOK-BACK PERIOD STATE HAS 4-YEAR LOOK-BACK PERIOD INADEQUATE CONSIDERATION RENDERS DEBTOR INSOLVENT HINDERS, DEFRAUDS CREDITORS 16

17 THUS, IF OFFICERS HAVE PAID THEMSELVES THERE IS RISK OF TRUSTEE SUING TO RECOVER PAYMENT SAME WOULD APPLY TO OTHER INSIDERS SO...WHY FILE CHAPTER 7 FOR CORPORATION, LLC, OR PARTNERSHIP? IN MOST CASES, NO REASON TO FILE CHAPTER 7 DISSOLVE UNDER STATE LAW LIQUIDATE ASSETS, IF ANY LETTER TO CREDITORS 17

18 FILE CHAPTER 7 FOR BUSINESS IF: NEED ORDERLY LIQUIDATION BY TRUSTEE PUT END TO CREDITOR HARASSMENT TO STOP OUTFLOW OF ASSETS: INVOLUNTARY FILING BY CREDITORS To prevent personal assessment of delinquent Labor & Industries debt under RCW (4) 18

19 FILING FOR MARRIED COUPLES Bankruptcy can be single or joint filing For joint, debtors must be married But can file single even if married Chapter 13 debt limits ( 109(e)) Amounts not doubled in joint cases Count community and separate debts Cannot force spouse to file jointly But, in certain circumstances, can file involuntary against non-filing spouse:

20 Advantages to joint filing: Cheaper (one filing fee) No race to courthouse Discharge for both No 523(a)(15) risk to debtor who agreed to indemnify Disadvantages to joint filing Less control over exemptions Defaults to federal exemptions if spouses cannot agree 20

21 Effect on separate property is that it may be used to pay community debts under 726 Includes other spouse's discharge issues MEETING OF CREDITORS ( 341) In joint cases, both spouses must attend In increasingly rare circumstances, can do by interrogatories -- Must get court's permission 21

22 Takes place about one month after filing of bankruptcy petition. Creditors rarely appear at 341 Meeting. PROPERTY OF BANKRUPTCY ESTATE 11 U.S.C. 541 Debtor's and non-filing spouse's CP comes into estate First spouse to file brings all CP and debtor's SP into estate This means that first spouse/debtor to file bankruptcy will determine which exemptions to choose. 22

23 PREBANKRUPTCY PLANNING AND ETHICS Fraudulent Transfers Concealment of Assets (Criminal) Bankruptcy crime (Title 18, sections 152 through 157) Can result in: Denial of discharge ( 727) Or imprisonment, fines On advice of counsel? Often not defense to loss of discharge -good faith requirement Remedy may be to unwind transfer prepetition 23

24 PREPETITION FRAUDULENT TRANSFERS (NONCRIMINAL) Recoverable postpetition from transferee Must disclose in bankruptcy schedules Preferences 90 days prepetition, 1 year for insiders Not applicable to secured debt generally Creditor s viewpoint: take the money and run WHERE TO FILE FOR EXEMPTIONS 522(b)(3): Law governing Debtor s exemptions is law of place where Debtor s domicile was for 730 days before filing. 24

25 If not in a single state that long, then governing law is where Debtor was for majority of 180-day period preceding the 730 days before filing Objections to exemptions: Deadline within 30 days after 341 Meeting OR 30 days after amendment filed Even baseless exemptions deemed allowed if no timely objection filed If only one spouse files: If no exemptions filed, debtor's dependent can elect exemptions 522(l) First spouse to file will determine exemptions 25

26 If both spouses file jointly: Cannot "stack" federal and state (unless spouses file separately and at least 6 months apart): 522(b)(1) Most exemption amounts double in joint cases (not state homestead) R.C.W et seq As of July 22, 2007, state homestead increased to $125,000 26

27 Will each unmarried domestic partner be able to claim the $125,000 homestead exemption? In re Rabin, 359 B.R. 242 (9th Cir BAP 2007) Debtors who were same-sex couple registered under California s domestic partners legislation filed separate bankruptcies and each claimed homestead in same residence. The BAP held that, since the domestic partner law specified that registered domestic partners were to be treated as spouses under California law (with certain exceptions), they would be treated as married for application of state homestead statute. 27

28 Claimant must have legal or equitable interest mere occupancy not enough Apartment house where owner also resides can be homesteaded. State ex rel. Van Doren, 179 Wash 241 (1934) Homestead is automatic if debtor lives in residence RCW (1) 28

29 Otherwise, file declaration of intent to homestead RCW (20) Homestead can be established at any time prior to sale of property. Lien v. Hoffman, 49 Wn. 2D 642 (1957) Homestead can be claimed against pre-existing judgment Federal CreditBank v. o/s Sablefish, 111 Wn. 2D 219 (1988) 29

30 EXCEPTIONS TO HOMESTEAD EXEMPTION IRS tax liens Washington Dep t. of Revenue Warrants for unpaid sales tax Mechanic's, laborer's, materialmen's or vendor's Liens. RCW (2) 30

31 Mortgages and deeds of trust RCW (2) Child support and maintenance RCW (4) Condo or homeowners' association's liens RCW (5) 31

32 Judicial lien for child support or maintenance 522(f)(1)(A)(I) EFFECT OF DISCHARGE ( 524) Who gets benefit of discharge: Joint filing: both spouses get discharge Separate filing: Only debtor spouse and community get discharge 32

33 EXEMPTION PLANNING The Exemptions Cannot mix federal and state exemptions Both federal and state double, with some exceptions, when filing is joint EDUCATIONAL RETIREMENT ACCOUNTS & STATE TUITION PROGRAMS 541(b)(5): Money placed in educational retirement account at least 365 days prepetition, within IRS limits, for benefit of debtor s child, grandchild or stepchild, stepgrandchild, is NOT property of the estate. $5,000 limit on money transferred between 1 & 2 years prepetition 541(b)(6): Similar contributions to State tuition programs, IRS qualified, also NOT property of the estate 33

34 Exempting transferred property If debtor voluntarily transfers property later recovered by Trustee, debtor loses right to exempt the recovered property 522(g), (h) Federal exemptions - 522: Homestead less for single filing IRA s less safe Larger household items exemption Wild Card exemption $11,975 per debtor if homestead not used up 34

35 State exemptions Homestead same for single or joint filing and much higher than federal IRA s safe so far CONVERSION OF NONEXEMPT TO EXEMPT Not per se fraudulent Smell test Actual intent to defraud INDICIA OF FRAUDULENT EXEMPTION PLANNING: Extravagant spending on eve of bankruptcy Wholesale conversion (too much) 35

36 Gain creditor moratorium, then convert Timing of filing of bankruptcy EXAMPLES OF PLANNING LIKELY TO BE ACCEPTABLE Prepay mortgage one or two months Make moderate IRA contributions Groceries Prepay tuition on moderate basis Necessary car repairs, new tires Make down payment on house 36

37 EXAMPLES OF BAD PLANNING: Give property to mom Prepay one year of mortgage payments Buy car with more equity than can exempt Spend excess cash unnecessarily Buy large life insurance policy on eve of filing REMEDIES FOR CREDITORS WHERE EXEMPTION PLANNING EXCESSIVE Bring 727 action Object to exemptions (30 days after 341 meeting) Alert U.S. Trustee 37

38 Move to dismiss for bad faith Bring preference recovery action Bring fraudulent transfer recovery action 38