It is commonly “understood” that a wholly unsecured second mortgage or equity line can only be stripped in a chapter 13 and cannot be stripped in a chapter 7. This is based on the reasoning in the Supreme Court case Dewsup. However. the 11th Cir in In re McNeal, Case no 11-11352, found that Folendore, 862 F. 2d 1537(11th Cir 1989) remains as controlling precedent within the 11th circuit which allows stripping in a chapter 7.

A more distressing recent case is Judge Cristol’s in In re Alvarez, 11-44246 BKC AJC(DE 63)(April 24, 2012). Debtor owned the home with non-debtor spouse as tenancy by the entireties. Spouse did not sign the promissory note. Court held that debtor could not strip the second mortgage unless both husband and wife filed the chapter 13. (Does anyone see the irony? Local judges have held that a Debtor cannot strip if not eligible for discharge due to prior 7, in Alvarez, even though never signed the note so nothing to discharge spouse must join in the chapter 13?)

Debtors in chapter 13 can file motions to value secured property so that the debtor only has to pay the value of the collateral. (This is an overbroad statement so discuss this issue with your attorney.) So the debtor filed a motion to value the retaining lien. What is the value of the documents retained by the attorney?

Miami bankruptcy Judge Cristol held that the value of the retaining lien in chapter 13 is the full amount of the debt based on state law.In re Alfaro, 2012 Bankr Lexis 1626, (Bankr. S. D. FL April 13, 2012)(11-35116)

However, what is the net result? The opinion recites that the debtor had informed the court that she did not need the documents. So as a practical matter, the debtor could surrender any claim to recovering the files held under the retaining lien.

The bankruptcy code has detailed procedures and disclosures required for a debtor to reaffirm a debt. There are no real procedures for assuming a lease. So for a car lease, must or should the debtor also reaffirm the debt to retain possession, and from the lender’s perspective, keep the debtor responsible for payments?(The debtor would be responsible for a deficiency if he or she could not pay and the car was repossessed after a repossession).

There has been a split accross the country on this issue. However, recently Fort Lauderdale bankruptcy Judge Olson concluded that the reaffirmation and lease assumptions are separate procedures. Judge Olson will deny any reaffirmations on car leases since they are unnecessary. Lease assumptions are strictly between the lessor and lessee(consumer), and a lease assumption should not be filed with the court. In re Perlman, 2012 Bankr Lexis 1445(Bankr. S.D. FL April 6, 2012)(Case no 11-41597)

Considering there remains a disagreement in court decisions, one wonders whether a debtor who assumes a car lease, defaults, and is sued in state court, can defend the state court suit on the basis of lack of a reaffirmation agreement.

As a Fort Lauderdale bankruptcy lawyer, this program should be of interest for a detailed introduction to handling chapter 13 cases.

A case just decided is helpful on one issue. Suppose a debtor at the time of filing bankruptcy has no equity in a vehicle. But after payments made during a chapter 13 Fort Lauderdale bankruptcy, the debtor may now have equity in the vehicle. Does the chapter 7 trustee have a claim on the vehicle based on the accumulated equity at the time of the conversion to chapter 7?

In re Robinson,, 2012 Bankr Lexis 1960(Bankr. M. D. FL May 3, 2012) involved a debtor who made car payments as part of the chapter 13 plan before converting to chapter 7. Judge Funk recognized that there was no binding authority and recognized a split in the case law. However, he did rely on a prior decision by Judge Paskay which involved payments outside of the Chapter 13 Plan. Perhaps more important for a South Florida Bankruptcy is that Judge Funk did rely upon a decision of Judge Mark in In re Sargente, 202 BR 1023(Bankr. S.D. FL. 1996).

The holding is that the chapter 7 trustee is not entitled to the equity increase that the debtor accumulated during the chapter 13 prior to conversion to chapter 7.

For a household of 1, the increase is from $40,766 to $42,053. For a household of 2, from $49,729 to $51,299.

Similarly, a household of 3 increases from $52,840 to $54,508. For a household of 4, from $62,742 to $64,722.

This increase may enable certain debtors to qualify for chapter 7 instead of chapter 13. Additionally, for debtors who need to file chapter 13, some debtors might now qualify for a 3 year plan(under median income) instead of the requirement of a 5 year plan (for over median debtors.)

The issue remained about older cars with more than 75,000 miles or 6 years old. The Internal Revenue Manual (IRM) for collections authorizes an additional operating expense of $200 per month for these vehicles. Lower courts have differed on this issue. This reflects a long-standing issue still not fully resolved as to the legal relevance of the IRM to the means test.

Judge Cristol, who is known as a critic of BAPCPA and of many of the absurdities of the statute, felt compelled to hold that the IRM is not part of the bankruptcy statute and cannot be used to permit the $200 additional expense deductible in the means test. Judge Cristol recognized that the frugal debtor with old vehicles is penalized.

This particular case is most troubling for these debtors which were the subject of a prior blog post. The debtor had converted to Chapter 13 over the chapter 7 trustee’s objection because the chapter 7 trustee had tried to sell the debtors’ residence to an investor. 2011 Bankr Lexis 3507. The debtors tried to take the $4,000 exemption($8,000 total) instead of claiming the home as exempt. Now, the debtors likely cannot afford the means test required plan payments because they cannot each take the $200 additional expense item. See Case no 11-13633 for the case history in the Southern District of Florida.

In Bakst v Cario, 2012 Bankr Lexis 1389, Judge Kimball addressed the issue of a debtor claiming bare legal title on real property originally owned only by her mother. The mother by quit claim deed added the daughter/debtor as joint tenants with right of survivorship. The deed stated that its purpose was estate planning. Judge Kimball rejected arguments of bare legal title as well as of a constructive or resulting trust. The deed provided on its face a transfer of a present interest and contained no trust language. As a result, the debtor could not claim that she really did not have an interest in one-half of the property. She was on the deed and was an owner.

The mother’s home could be sold with the proceeds divided between the chapter 7 trustee and the mother.

For those who attended our seminar, recall the discussion of an enhanced life estate, a so-called “lady-bird” deed, which would likely would have had a different result. These life estates retain full control of the property to the grantor.

I do want to stress that there have been several very recent cases by different bankruptcy judges in the Southern District of Florida where debtors have lost on the claim of bare legal title, so bankruptcy attorneys counsel must be careful.

However, what if on paper the debtor transferred a business more than 4 years ago, but really retained the benefits and control of the business. The debtor is really the secret or equitable owner of the business, but does not list this interest as an asset. The debtor’s discharge can be denied for continuing concealment. See In re Bellassai, Case No. 11-CV-61578(Williams)(March 22, 2012), affirming a decision by Judge Olson in Case no 09-01568, 451 BR 594(2011).

SomeFlorida bankruptcy attorneys have argued that a debtor who is married does not have to assert the homestead exemption because realistically the trustee cannot sell the home because the debtor’s non-filing spouse retains her homestead exemption. There is case law denying the debtor’s efforts to assert this exemption.

But consider a married debtor files bankruptcy and the home is only listed as exempt as tenancy by the entireties and there is no joint debt. Judge Briskman in the Middle District of Florida held that the debtor can utilize the $4,000 exemption.In re Kehoe2012 Bankr Lexis 1321. The court distinguished an earlier case by Judge Mark due to the joint debt issue. When there is no joint debt, each spouse is protected from creditors on property held by tenancy by the entireties.