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Amazing: $185,000 tax refund protected

Saturday, December 17th, 2011

How can a Florida debtor protect a $185,000 tax refund? We all know that homesteads in Florida are fully exempt from creditors(I am overgeneralizing). Under Florida law, savings or similar assets can be used to purchase a house or pay down a mortgage, and the homestead is exempt, even if there were creditors at the time. However, the new bankruptcy law in 2005 provides for a 10 year fraudulent transfer period to challenge the homestead exemption in these circumstances.

Recent debtors received an amazing holiday present. In re Cook, 2011 Bankr. Lexis 4757 (Bankr. N. D. FL Dec. 7, 2011), the debtors had lost their home that was once worth $5,000,000. The joint debtors received a $185,000 tax refund in 2010, and used this as a downpayment on an $800,000 home. The chapter 7 trustee and a creditor objected to the homestead. Judge Killian held in favor of the debtors. Even though there were some badges of fraud, the Court did not find that there was fraudulent intent and recognized the importance of Florida homestead protection.

Frankly, I might not have filed this case. There is a huge risk for a debtor to file bankruptcy in these circumstances, and a bankruptcy judge in South Florida including Broward County might have ruled against the debtor.

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Cars More at Risk in Chapter 7 in Fort Lauderdale (Broward)

Tuesday, December 13th, 2011

Chapter 7 debtors in Fort Lauderdale bankruptcies will have a tougher time retaining vehicles that have value or equity. In Florida, debtors only have a $1,000 exemption against motor vehicles. (An additional $4,000 is available when the debtor does not receive the benefit of a homestead, but that’s a completely different issue).

A debtor with equity in a vehicle is subject to the chapter 7 trustee taking and selling the vehicle. The trustee is more than willing to accept a lump sum payment so the debtor can retain the vehicle. The issue is whether the chapter 7 trustee will accept payments over typically 6 months or will the trustee demand lump sum payment. There are three new trustees for Chapter 7 Broward County bankruptcies. Two of them who practice in that far and away location of Palm Beach County will require a lump sum payment. (They are concerned about liability if the debtor is in an accident during a payment plan. The trustee, they fear, could be considered as the owner).

Debtors must be aware of the risk of losing the vehicle with equity prior to making the decision to file chapter 7 bankruptcy. They need to be prepared to either pay the trustee from non-exempt assets or surrender the vehicle. Note that the trustee’s approach could be self-defeating. More debtors will file chapter 13 because they can have a 3-5 year payment and retain the vehicle.

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Inherited IRAs, Continued

Saturday, December 10th, 2011

Just to update prior posts, the Florida Legislature has provided in Section 222.21(c)(3)(2011) that inherited IRAs are protected from creditors. But as a further observation on exemptions, it is still necessary to be sure that the debtor has resided in Florida for at least 2 years. Otherwise, Florida exemption statutes will not protect the debtor in bankruptcies.

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Self-Settled Trust

Sunday, November 20th, 2011

In Re Quaid, 2011 US Dist Lexis 132299, (D. Ct. M.D. FL Nov 15, 2011) the United States District court reversed the decision of the bankruptcy court, Judge Briskman. Debto’s spouse had set up a trust. Funds were later transferred from a tenants by the entireties account to the trust. Non-debtor spouse died. The district court held that the trust was not a self-settled trust and the spendthrift clause shielded the asset from the bankruptcy trustee. The deceased spouse had the right to withdraw funds and revoke the trust, so the debtor was not the settlor, so the spendthrift clause controlled.

So what really happened here? We know that husband and wife can own property as tenancy by the entireties. This means that a creditor of one spouse cannot reach or split the asset held as tenants by the entireties. But the tenancy ends upon death or divorce. So if one spouse passes away, the surviving spouse becomes the 100% owner of the asset which is now subject to that person’s creditors.

In Quaid, Mr. and Mrs. Quaid transferred over $300,000 from a tenancy by the entireties bank account into a trust. Only one party had control of the trust, causing a loss of tenancy by the entireties protection, the court observed. Tommie, the wife, had set up the trust originally and was the only person who could withdraw or revoke funds. Upon her death, the debtor and his son became co-trustees. A $3,000,000 judgment was entered against the surviving spouse, Mr. Quaid. If he had been the sole owner of the funds, the assets would have been subject to his creditors. Since the funds were not in a self-settled trust, the district court held that the bankruptcy trustee could not reach these funds. The court reviewed Florida law and discussed the characteristics to determine whether or not a trust is self-settled.

Note there was no discussion of a fraudulent transfer issue, but under Florida law cannot fraudulently transfer property held as tenants by the entireties.

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Do I really have to stay in ch. 13 for 5 years?

Sunday, August 21st, 2011

Chapter 13 plans are typically from 3-5 years. In Florida, which is bound by decisions of the 11th Circuit Court of Appeals, a debtor who is above median income on the means test must be in a 5 year plan. In re Tennyson. 611 F. 3d 873(11th Cir. 2010). The idea under BAPCPA is that the applicable commitment period for an above median income debtor is 5 years during which time the debtor must pay his disposable income.

What if the debtor is able to pay off the chapter 13 plan early? This could not be from increased income, because the debtor would have greater disposable income and would be able to increase the chapter 13 payments. But what if a family member could make a gift, or the debtor could fund the plan from exempt funds such as an IRA?

In the past, I have obtained early payoffs with the consent of Robin Weiner, Chapter 13 Trustee for Broward and Palm Beach counties in Florida. But Tennyson has caused a concern for the trustee that a chapter 13 case should perhaps remain open for the required term because the debtor could have additional income.

A recent case from the Middle District of Florida expressly authorized the early payoff of a chapter 13 plan when a motion was filed with clear notice to the creditors. In re Smith, 449 BR 817(Bankr. M. D. FL June 6, 2011). The court examined the Tennyson case and concluded it did not prevent an early payoff.

As a Fort Lauderdale bankruptcy attorney, I recognize that the early completion of a chapter 13 bankruptcy is extremely beneficial to clients who are able to obtain an independent source of funds to complete plan payments.

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IRS Form 1099-C: Is the debt actually forgiven and released?

Friday, August 5th, 2011

UPDATED August 25:
Judge Olson, at the end of an Order to Show Cause against several attorneys, in a short discussion, said that an issuance of a 1099 is not a basis to object to a Proof of Claim. Case no 10-49318(also can be seen at Case no 11-13345 JKO (DE 148) >(In re MacFArland)

The question often arises for a debtor as to the pros and cons of settling credit cards at a discount or a completing a short sale. The filing of a chapter 7 bankruptcy prior to any short sale or settlement should eliminate this problem because no debt is forgiven. Sometimes creditors on their own charge off an account and issue a 1099-c creating a taxable event for the recipient. This forgiveness of debt income is taxable, though an IRS Form 982 to show insolvency might often be used to avoid tax liability.

But does the filing of a 1099-c by the creditor mean the debt is released and that the creditor, or a debt purchasing company, can’t sue? Many would assume that the creditor cannot sue and that the issuance of the 1099 would be a defense. Similarly, could a creditor file a proof of claim in a bankrupcy after it had already issued a 1099C?

Bankruptcy courts have determined that the 1099c does not imply that the creditor has released its right to recover on the underlying debt or deficiency. In re Zilka, 407 BR 684(Bankr. W. D. Pa 2009). However, the debtor may have been forced to pay income taxes on the 1099. The creditor would then have to withdraw its 1099c reporting to IRS so that the debtor could receive a tax refund. Also see USA v Reed, 2010 U.S. Dist Lexis 96079(US D. Ct. E.D. Tenn.)

Posted in Bankruptcy Cases and Laws, Bankruptcy Planning, Foreclosure News | No Comments »

Fraudulent Transfer into Homestead? Klinglesmith

Saturday, June 25th, 2011

The homestead protection under Florida law was restricted by BAPCPA. One of the major changes was to permit a chapter 7 trustee to recover against homestead if non-exempt assets were transferred into the home. Section 522(o) essentially superseded Florida law on this issue. This issue remains a major risk for debtor attorneys to avoid filing a case that risks losing the debtor’s home.

But the trustee or any creditor objecting to homestead must satisfy the proof requirements of Section 522(o) to establish that the transfer was made “with the intent ot hinder, delay, or defraud a creditor…” These cases are fact specific. In the recent case of In re Klinglesmith, 2011 Bankr Lexis 2230, (Bankr. M. D. FL. June 2, 2011), Judge Jennemann rejected the trustee’s objection. The debtor actually went on a “debt repayment spree”. The facts are too complicated to discuss here, but this is a case that should be reviewed whenever a case involves a large transfer of non-exempt to exempt assets. As a Ft. Lauderdale bankruptcy attorney, one of the first questions I ask of any new client involves what funds were used to purchase or upgrade a homestead.

Posted in Bankruptcy Cases and Laws, Bankruptcy Planning | 1 Comment »

Be Careful about Borrowing from and Repaying Relatives

Saturday, June 4th, 2011

Recently a client informed us that she had used her tax refund to pay her property taxes and other necessary expenses. That’s just fine. However, when we looked at her checkbook, it became clear that the client had paid relatives instead. One relative advanced the money to pay the taxes, and the debtor wrote a check repaying the relative. Other relatives were also reimbursed. Instead of waiting to use the tax refund to directly pay expenses, the debtor has created a serious problem.

The debtor has now set up a preference claim in which the trustee can demand reimbursement from the relative. The debtor made a repayment of a loan to “an insider”, and the trustee now has a right to recover this money unless the debtor waits one year to file bankruptcy.

As a Fort Lauderdale bankruptcy attorney in Hollywood, Florida, we will have to properly consult with the client to review the options and strategy she will want to pursue.

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Bankruptcy and Reverse Mortgages

Friday, May 6th, 2011

Reverse mortgages can at times be extremely beneficial to senior citizens to be able to obtain use of the equity in their homestead. The homeowner can eliminate the requirement to pay on a mortgage and may be able to receive an income stream from the lender.(This is not actually income but is a steady receipt of loan proceeds)(Also note that for practitioners in other states care must be given to the amount of homestead protection, which is unlimited in Florida.)

But timing is everything. A potential client saw me for a consultation last week. The client already obtained a reverse mortgage and took a lump sum of cash from the reverse mortgage. Meanwhile, the client had existing credit card debt which would easily justify a bankruptcy. Clearly, the bankruptcy should have come first, all debts would be discharged, and then the owner could safely get cash out.(Also, the client transferred the funds for the family to purchase property for her out of state to be the new residence.)

(Note that in the above case there is an argument that the funds taken out from the reverse mortgage, if still traceable, are the proceeds of the homestead and therefore exempt. But this was not a sale, and loan proceeds would likely be challenged as exempt by the trustee.)

In this case, as a Fort Lauderdale bankruptcy attorney in Broward County, Florida, it was certainly apparent that there would be great problems if a bankruptcy were to be filed.

Posted in Bankruptcy Information, Bankruptcy Planning, Bankruptcy: Probate and Estate Planning | No Comments »

Beware of Wells Fargo Bank Accounts

Sunday, January 2nd, 2011

Debtors should not maintain bank accounts at the same bank where they owe money on a credit card. The depository agreement provides a right of set-off against the account. In other words, if you owe Bank of America on a $5,000 credit card and you have a bank account with Bank of America, the bank can seize the money from your bank account.

Wells Fargo has been freezing bank accounts even if the depositor does not owe it any money when the depositor files bankruptcy. The bank is concerned that a bankruptcy trustee will claim the bank has a duty not to permit the debtor to use his or her bank account because the trustee might claim the money. A debtor might be stuck not being able to pay his bills because Wells Fargo denied access to the account. The validity of this freezing of the account is being litigated accross the country. Though it is unlikely for accounts with small balances that Wells Fargo would freeze the account, the best advice is don’t use Wells Fargo(and remember if you have a Wachovia account it is now Wells Fargo).

Posted in Bankruptcy Information, Bankruptcy Planning | No Comments »

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