Fears Nachawati Sponsors Feed My Starving Children Volunteering Event

Fears | Nachawati Law Firm proudly sponsored Feed My Starving Children’s volunteering event this past weekend at the Parish Episcopal School in Dallas. Feed My Starving Children is a Christian non-profit organization committed to eliminating poverty and starvation around the world by providing food for malnourished children. Employees and their families had the opportunity to help pack meals for starvi

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8th Circuit Forces Married Debtors to Consolidate Bankruptcy Cases

During bankruptcy a debtor must apply legal exemptions to protect property from creditors. The Bankruptcy Code allows the debtor to choose between state and federal exemptions, but also permits states to “opt-out” and force their residents to apply state law exemptions.

 
A married couple filing bankruptcy faces these same exemption law decisions. However, there is nothing in the Bankruptcy Code that forces a married couple to file bankruptcy jointly. In some cases, separate filing is sound strategy. In other cases, filing separately simply invites further litigation.
 
The Eighth Circuit Court of Appeals recently decided an interesting case where a married couple filed separate Chapter 7 bankruptcy cases. The husband claimed protection under the federal law exemptions, and the wife claimed Arkansas exemptions to protect her property. In this case the husband was able to take advantage of greater protections under Section 522(d) to exempt his annuities, while his wife applied an Arkansas homestead exemption to protect her debt-free home.
 
The bankruptcy trustee objected and sought consolidation of the two cases. The trustee argued that the debtors were “stacking” exemptions and should be forced to select one exemption scheme. The debtors responded that they were separated and maintained different households.
 
The Eighth Circuit was asked whether two lower courts had abused discretion by forcing the consolidation of the cases. It turned to the case of In re Reider, 31 F.3d 1102 (11th Cir. 1994), for guidance and asked two questions: “(1) whether there is a substantial identity between the assets, liabilities, and handling of financial affairs between the debtor spouses; and (2) whether harm will result from permitting or denying consolidation.” 
 
For the first prong, the Circuit Court examined the facts of the case: the two debtors lived separately; wife had no mortgage on her home while husband was surrendering his; they owned separate insurance policies, separate interests in businesses, separate annuities, separate IRAs, and individual credit card debt. On the other hand, the couple shared a checking account, several credit cards, and a leased car. They had jointly withdrawn funds from IRAs on two occasions, they had joint state and federal tax obligations, and were jointly liable on a civil judgment. The Circuit Court found no abuse in the decision that there was substantial identity between the debtors.
 
For the second prong, the Court found that the lower courts did not abuse discretion by holding that the benefit to creditors outweighed any prejudice the debtors would suffer by consolidating the cases. The Court said, “Stated differently, the bankruptcy court found that if Marilyn were permitted to exempt her home under Arkansas law and Samuel were permitted to exempt his IRAs and annuities under federal law, their separate estates would have significantly less value than if their cases were substantively consolidated and the Boellners were forced to choose either federal or state exemptions.” For more information on this case, see Boellner v. Dowden, No. 14-2816 (8th Cir. May 12, 2015). 
 
If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

Valuing Collectibles in Bankruptcy

During an individual bankruptcy, all personal property must be identified and valued. Schedule B of the official bankruptcy forms specifically requires information for all “collections or collectibles.” Valuing collectibles during bankruptcy can get tricky, and properly valuing collectibles can mean the difference between keeping and losing the property. Some collections, like Beanie Babies or Precious Moments Figurines, have poor resale value. On the other hand, gun collections have good resale value. 
 
In many cases, the bankruptcy trustee knows little or nothing about the collection or its condition, and will initially rely on the debtor to give a good faith estimate of its worth. The value of the collection should be a “quick sale value,” which is akin to what other similar items in the same condition are selling for in a “quick sale” marketplace like an auction or eBay.
 
In most cases, offering the trustee some evidence of how the collectibles are valued will end the inquiry. For instance, if prices are documented from recent transactions on eBay, or an “expert” provides a statement of fair market value, the investigation into the value of the collection may end. On the other hand, stating that a collection has an “unknown” value only leads to more questions and closer scrutiny.
 
Take, for example, the recent corporate bankruptcy filing by Frederick’s of Hollywood. Included in the assets of this case is a large collection of celebrity under garments worn by stars such as Marilyn Monroe, Robert Redford, and Madonna. The five page list of this collection included in the bankruptcy schedules describes each item, but states that its value is “unknown.”

The Frederick’s case is a Chapter 11 bankruptcy, which is a corporate restructuring, and many of these items may be sold at auction to the highest bidder. In contrast, most personal collections included in a Chapter 7 or Chapter 13 bankruptcy case may be protected from sale at auction due to federal or state legal exemptions. By properly valuing collectibles, an individual debtor may apply these legal exemptions and, in many cases, keep the entire collection. 

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

 

Banks Agree to Report Debts as Discharged

There are many false beliefs when it comes to discharged debts.  Some believe that debts are “erased;” others believe that discharged debts are no longer legal obligations. Neither of these beliefs are accurate.

In simple terms, a discharged debt means that the creditor is enjoined from collecting on that debt from the debtor. The bankruptcy discharge is a court injunction that protects the debtor, personally. The debt is not erased and the creditor may still collect from anyone other than the debtor by any legal means that does not violate the bankruptcy injunction. That may mean repossessing or foreclosing on the debtor’s property (actions that are against the property, not against the person), making harassing collection calls to co-debtors, or even filing lawsuits that do not seek money from the discharged debtor.

Because the discharge order only prohibits a creditor’s conduct and does not “erase” a legal debt, many creditors sell these debts in bulk to third party collectors. Sometimes these debts end up with zombie collectors who harass debtors for payment of “dead” debts. The original creditors claim clean hands because they take no part in violating the bankruptcy court’s discharge injunction. Additionally, there is no order to update credit reports to reflect the bankruptcy discharge.

But the times they are a changin’.

Recently, The New York Times reported that Bank of America and JPMorgan Chase have agreed to update borrowers’ credit reports within the next three months to reflect the correct status of discharged debts. This comes in response to lawsuits filed against the megabanks accusing them of deliberately ignoring bankruptcy discharges in order to make more money when selling off pools of bad debts to third party debt buyers. The lawsuits accuse the banks of purposely holding individual credit reports hostage, refusing to update reports or fix mistakes unless money is paid for debts discharged in bankruptcy.

Typically, a credit report is updated by a creditor to correctly reflect that the debt is “discharged in bankruptcy” and that the balance is “zero.” This stops all negative reporting and allows the individual’s credit score to improve over time. Bank of America promised to go further, agreeing to remove any marks on consumers’ credit reports for all credit-card debts sold since May 2007.

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

 

Bankruptcy Debtors Can Take the Money and Run after Conversion

Chapter 13 cases have a low rate of completion for many reasons. Most statistics show that less than half of all Chapter 13 cases filed receive a Chapter 13 discharge. Some Chapter 13 cases are voluntarily dismissed because the reason for filing has been resolved; other cases are converted because the debtor cannot keep up plan payments.

The United States Supreme Court was recently asked an important question in the case of Harris v. Viegelahn, No. 14-400 (5/18/15): what happens to money the trustee is holding when a Chapter 13 case is converted to Chapter 7? The unanimous opinion of the Court was that the money is returned to the debtor.

Section 348(f) of the Bankruptcy Code states that absent bad faith, when a Chapter 13 case is converted to Chapter 7, “property of the estate” is that property which was originally part of the Chapter 13 estate which remained "in the possession . . . or control" of the debtor. Section 348(e) states that the Chapter 13 trustee’s services are terminated upon conversion.

The Supreme Court interpreted these statutes and found that that money paid to the Chapter 13 trustee after the bankruptcy case was filed, but not distributed as of the date of the conversion to Chapter 7, was not part of the debtor’s new Chapter 7 case. Therefore, the money must be returned to the debtor. The Court further decided that paying money to creditors was a “service” provided by the trustee and therefore something that could not be done after conversion. The Court found that the estate’s creditors had no claim on the funds until they were paid to the creditors.

In deciding that this money should return to the debtor, the Supreme Court rejected the Fifth Circuit’s policy argument that this would result in a “windfall” for the debtor. The Court reasoned that these funds would have belonged to the debtor if he had initially filed under Chapter 7. The Court suggested that creditors avoid situations where the trustee “sits” on debtor funds and “seek to include in a Chapter 13 plan a schedule for regular disbursement of funds the trustee collects.” 

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com

Will the Trustee Come to My Home?

Debtors commonly ask, “Will the trustee come to my home?” The quick answer is “No.” Well, that’s the correct answer almost always. Just like every other “certain” rule in bankruptcy, there are exceptions.

Section 704(a) of the Bankruptcy Code directs the bankruptcy trustee to “collect and reduce to money the property of the estate for which such trustee serves.” Sometimes that duty requires the trustee to visit the site of the property. A trustee may do a drive-by on real estate, or may arrange for an appraiser to inspect a vehicle, or may ask to enter a debtor’s home to view a high dollar item, such as a grand piano. The circumstances will dictate when a trustee’s visit is reasonable or likely.

Another time the trustee may decide to do a home visit is when the debtor has demonstrated dishonesty or a lack of candor regarding his property. That occurred in the case of In re Bursztyn, 366 B.R. 353 (Bankr. D. N.J. 2007). The trustee in Bursztyn found discrepancies between the filings in the debtor’s recent dissolution case and her bankruptcy schedules. Specifically, the trustee suspected that the debtor was hiding valuable jewelry and artwork.

After many fruitless requests for information and turnover of property, the Trustee sought a warrant to search the debtor’s home. The bankruptcy court issued the search warrant, and the trustee, with the help of a U.S. Marshall, recovered jewelry and art at the debtor’s home worth approximately $250,000.

The debtor claimed that the trustee’s search violated her Fourth Amendment rights. The bankruptcy court disagreed. It found that while the bankruptcy trustee is bound by the Fourth Amendment, the search of the debtor’s home was not unreasonable. The court pointed to the reduced expectation of privacy in a bankruptcy debtor’s “houses, papers and effects.” While a bankruptcy debtor does not give up all rights to privacy, there is a “strong public interest and policy in full, open and proper administration of a bankruptcy case by a trustee, including a thorough investigation of the debtor’s assets.” The court found that under the circumstances of the case (including a finding that the debtor had not acted “honest nor credible” during the bankruptcy; that there was reason to believe that the debtor was concealing property; that the items were physically small and easily concealed; and that the trustee had made repeated requests for turnover) the search was reasonable and the evidence would not be suppressed.

Courts have both approved and rejected requests for search warrants. For instance, in Spacone v. Burke (In re Truck-A-Way), 300 B.R. 31 (E.D. Cal. 2003), the bankruptcy court refused to issue a search warrant. While recognizing the civil nature of the bankruptcy trustee’s search, the court nonetheless concluded that the only avenue for a trustee to seek a search warrant is through Rule 41 of the Federal Rules of Criminal Procedure. The court held that a bankruptcy trustee has no authority under Rule 41 because a trustee is neither a federal “law enforcement officer” nor “an attorney for the government” as required by that Rule. The court stated, “Clearly the explicit requirements of Rule 41 reflect the exacting mandate of the Fourth Amendment and cannot be circumvented by the statutory structure created by the Bankruptcy Code.” At least one author disagrees with this analysis and points to the Federal All Writs Act and Section 105 of the Bankruptcy Code as providing the authority for a bankruptcy court to issue a search order. See Michael D. Sousa, A Casus Omissus in Preventing Bankruptcy Fraud: Ordering a Search of a Debtor's Home, 73 Ohio St. L.J. 93 (2012).

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

Families Fight to Keep College Tuition from Bankruptcy Trustees

As reported by the Wall Street Journal, there is a growing trend among bankruptcy trustees to recover college tuition paid by bankruptcy debtors on behalf of their children. Under the U.S. Bankruptcy Code, a trustee can sue to take back money that a bankrupt person spent several years before filing for protection if the trustee finds that the person didn’t get “reasonably equivalent value” for that expense. Since the parent did not receive “value” from the college education (the child did), the payment may be recoverable and distributed fairly between all of the debtor’s creditors. 

 
This provision of the law is not new. Trustees routinely sue to recover money or property “gifted” to another person on the eve of a bankruptcy filing. These transfers are often fraudulent, but are sometimes innocent. The law does not make a distinction when it comes to these types of gifts.
 
Traditionally, bankruptcy trustees have not sought recovery of college tuition payments. This is likely because of fairness concerns and that the amount of money at issue was historically low. However, the trend has increased as college tuition rates have skyrocketed. In 1990 the annual cost at a state college was around $5,000. Today it is over $15,000 per year.  
 
Last February, the University of Bridgeport returned $4,000 in college tuition payments after being sued by the bankruptcy trustee after a student’s parents filed for Chapter 7 bankruptcy. The school said in a court filing it reserved the right to go after the student to recover this money.
New York University was sued in October to turn over $27,152 for a Minnesota couple’s debts. Pace University quickly settled a lawsuit in September, agreeing to pay $23,290.80.
 
If you are contemplating bankruptcy and have paid college tuition in the recent past, speak with an experienced bankruptcy attorney about the possibility of a trustee lawsuit. This trend is not occurring in every jurisdiction or with every trustee. Your attorney can advise you as to the risks in your particular case.
 
If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

Partner Majed Nachawati appointed as Panel Chairman of State Bar of Texas Grievance Committee

We are proud to announce that Fears | Nachawati Law Firm Partner, Majed Nachawati, has recently been appointed as Panel Chairman on Panel 2, District 6 Grievance Committee of the State Bar of Texas. This appointment is highly prestigious, as the position is filled based up on nominations from other grievance committee members, and ultimately appointed by the Committee Chair.  The Committee’s job is to make sure that attorneys throughout the state of Texas uphold the integrity of the practice of law and remain accountable to the public and their clients. As part of his new role, Mr. Nachawati will be responsible for presiding over panel proceedings, evidentiary hearings, and the summary disposition docket. He is dedicated to protecting the public through his work on the Grievance Committee and hopes to advance and improve the quality of legal services to the public during his term as Panel Chairman.  Information about the firm or Mr. Nachawati can be found at www.fnlawfirm.com or by calling the firm at 1.866.705.7584.

Supreme Court Says No Immediate Appeal for Many Bankruptcy Issues

Most bankruptcy cases are comprised of different debt issues between the debtor and several creditors – all who are competing to get at the debtor’s limited resources. During the course of the case, a party may ask for the bankruptcy court to take action to alter the legal status or relationship of one or more parties. For instance, a party may ask the court:

  • To confirm a Chapter 13 plan;
  • To lift the automatic stay to foreclose, repossess, or continue a court action; or
  • To dismiss the debtor’s case.

For years there has been disagreement whether the party has a right to immediately appeal if the bankruptcy court denies such a request.

Recently the U.S. Supreme Court ruled in the case of Bullard v. Blue Hills Bank, No. 14-116 (5/4/15). In that case, Mr. Bullard submitted a Chapter 13 plan for court approval that proposed to modify Blue Hills Bank’s loan on his rental property. Mr. Bullard sought to continue to pay his monthly payment which would be applied to the secured portion of the property only. The unsecured portion would be paid at the same rate as other unsecured debts, with the remaining balance to be discharged at the end of the case. The bank objected, the court denied confirmation of the plan, and Mr. Bullard was given the opportunity to submit another plan.

Mr. Bullard appealed the court’s denial of confirmation. However, denial of confirmation isn’t a final order because Mr. Bullard was able to submit a new plan. In other words, the denial did not change his legal status. Consequently, the First Circuit Court of Appeals said the bankruptcy court denial could not be appealed.

The Supreme Court agreed to hear this case, and in a unanimous opinion authored by Chief Justice John Roberts, the court said, “Only plan confirmation, or case dismissal, alters the status quo and fixes the parties’ rights and obligations; denial of confirmation with leave to amend changes little and can hardly be described as final.”

What this means to a debtor in bankruptcy is plain: there is no right to appeal an order denying relief which does not change the status quo. If the case continues and the party is free to continue litigating the matter, the order is not final. This ruling is especially harsh to a Chapter 13 debtor like Mr. Bullard, who may be faced with a Hobson’s choice of submitting a new, less desirable repayment plan, or allowing the case to be dismissed to have the opportunity to challenge the bankruptcy court’s decision.

As a final note, under current bankruptcy rules a party may seek permission to appeal a non-final order, called an “interlocutory appeal.” This type of permissive appeal may or may not be granted and requires the aggrieved party to persuade the over-worked appeals court to hear the case. Interlocutory appeals must be granted at each stage of the appellate process. In the case of Bullard v. Blue Hills Bank, Mr. Bullard was granted an interlocutory appeal from the Bankruptcy Appellate Panel, but denied appeal at the circuit court level.

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

 

Timing is Everything in Bankruptcy

There are many important decisions to make when planning a bankruptcy filing. For example: Chapter 7 or Chapter 13? Joint or separate filing? Reaffirmation, redemption, or surrender? But the most important decision is when to file bankruptcy. The timing of the bankruptcy filing will determine many aspects of the debtor’s case.

 
Tax Refunds
The bankruptcy estate is determined on the date the case is filed. See 11 U.S.C. § 301. All property owned and debts owed on the date the case is filed must be listed in the bankruptcy schedules. A great example of how bankruptcy timing can affect a case is during tax season:
  • If the case is filed before the debtor receives the income tax refund, the refund is property of the bankruptcy estate. 
  • If the case is filed after the refund is received, but before the money is spent, the money is property of the bankruptcy estate. 
  • If the case is filed after the refund is received and after the money is spent, there is nothing left for the bankruptcy estate.

Timing is everything!

910 Vehicles
The Bankruptcy Code places time limitations on the debtor for obtaining certain relief. An example of this is the restriction on vehicle cram down in a Chapter 13 bankruptcy case. Suppose the debtor has a car that is worth $6,000 and $12,000 is owed on it. In a Chapter 13 case the debtor may cram down the car loan to its fair market value. In other words, the debtor pays $6,000 for a $6,000 car. The Bankruptcy Code restricts vehicle cram down to vehicles purchased more than 910 days (2-1/2 years) before the bankruptcy filing date. Waiting a bit to file bankruptcy could save thousands! Timing is everything!
 
Means Test
The timing of the bankruptcy filing can make a difference to the Bankruptcy Means Test. The Means Test requires the debtor to calculate income from all sources from the last full six months. This average income is then analyzed to determine disposable income – money paid to unsecured creditors during the case. Consider the case of a debtor who receives a yearly $12,000 employment bonus in May, then needs to file bankruptcy in November. The “look back” period for calculating income is the last full six months, or October, September, August, July, June, and May. Including May in the calculation artificially inflates the average monthly income by $2,000 per month (not $1,000, as one might reasonably would expect since the amount was a yearly bonus)! If the debtor waits until December 1 to file, May (and the bonus) are not considered by the Means Test. Timing is everything!
 
Residency Timing Issues
The Bankruptcy Code permits each state to decide to either allow its residents to choose between the federal exemptions contained in the Bankruptcy Code and that state’s exemption laws, or to “opt out” of the federal exemption scheme and compel residents to apply state law exemptions only. Consequently, a debtor who has recently relocated to a different state may have an opportunity to decide between the exemption schemes designed by two individual states. Timing is everything!
 
If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.