But often the client cannot or does not want to wait. The issue I would like to discuss here is when one spouse files and there is a joint tax return, what is the share of the tax refund that the debtor can retain, and what portion is subject to the claim of the chapter 7 trustee? There is conflicting case law and this issue typically leads to a settlement with the trustee, but knowledge of the possibilites can help the bankruptcy attorney with the bargaining.

A debtor can claim that the funds are held as tenants by the entireties, owned as husband and wife. This would enable the debtor to retain the entire refund. The debtor can only claim this entitlement if there are no joint debts. Judge Hyman in In re Gorny, 2008 Bankr Lexis 3726(Bankr. S.D. FL 2008) held that a tax refund could be claimed as tenants by the entireties.(and see cases cited by the court)

But I suspect Gorny would reflect a minority review as to the right to receive a refund being exempt as tenants by the entireties. In re Rice, 442 BR 140 (Bankr M.D. FL 2010), based on 11th Circuit analysis and citing numerous cases, held that the right to the refund in a joint tax return must be allocated between husband and wife based on what each would be entitled to receive.

Debtor’s counsel should compare the percent of each spouse’s income to the total income as well as the amount of tax withholding or estimated taxes paid by each. If possible the debtor can provide alternate tax returns as if filing the return separately or jointly.

The allocation method is a double edged sword. If the debtor has lower income, then the debtor would be entitled to a lower percentage of the refund subject to the trustee’s claim. If the debtor had most of the income, the trustee would be entitled to most of the refund.

A final note. I have been discussing the right to receive a refund. What if the refund has been received and not yet spent, especially if deposited into a joint bank account? The argument for tenancy by the entireties becomes stronger.(I recall a case that specifically made this point, likely one of the numerous cases cited by Rice, but I will leave that to the reader to research)

Well, another final note. In Florida the earned income credit is exempt, but don’t mix this up with the child credit.

11th Cir reviewed substantial split between circuits as to what constitutes defalcation. The 11th Circuit In Bullock concludes “defalcation requires a known breach of a fiduciary duty, such that the conduct can be characterized as objectively reckless”. The Court also holds that uncleans hands is not an affirmative defense. The Debtor can go back to state court to attempt to force the Bank to liquidate the collateral to help satisfy the state court judgment.

This cases summarized the substantial split in the legal standard accross the country, and for those of you outside of the 11th Circuit, this case does identify the different standards. As a Fort Lauderdale bankruptcy attorney, Bullock will set the starting point for analyzing the dischargeability of a debt by a trustee or other fiduciary.

For non-attorneys, you should be aware that creditors can file objections to getting rid of your debt based on certain types of conduct set forth in the bankruptcy statute. Improper conduct as a trustee, personal representative, or other type of fiduciary or trust relationship can be a basis to deny eliminating the debt created by this conduct.

Robin Weiner, Chapter 13 Trustee in Broward and Palm Beach County, Florida, has announced that, depending on the case, she will not assert that the debtor is over the jurisdictional limit.

At each morning motion calendar and at each 1:30 p.m calendar there are typically over 100 cases scheduled. Special settings are not being scheduled to June. The judicial assistant receives 100 voice messages a day, so do not expect a call back. If a true emergency hearing is needed, come to chambers.

Meanwhile, as reported in the press this week, David Stern is being sued for $60,000,000 for fraud when he took his mortgage processing company public(his law firm was the only client, which is now out of business)

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.

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.

Garner held the creditor was entitled to contract interest rate post-petition until confirmation, but was only entitled to the cram down interest rate of 4.25% post-confirmation.

The court held that the Statement of Intention pertains only as to the secured creditor, not to the trustee. The trustee could not sell the property despite the surrender language in the Statement of Intentions. The case is under appeal by the trustee.

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.