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.
 

The Anatomy of the U.S. Bankruptcy Court System

Once upon a time, most laymen knew what “going to court” meant. Today, we have a complex web of hierarchical courts and subject matter specific courts, both state and federal. Fortunately, navigating the bankruptcy system is fairly easy to understand. 
 
Most bankruptcy cases never progress past the bankruptcy court. In fact, most bankruptcy debtors never even see the bankruptcy judge. For cases that are difficult or unique, it is important to know the bankruptcy court system.
 
First (Lowest) Court Level
Jurisdiction to hear bankruptcy cases belongs exclusively to the federal courts. Federal district courts have original and exclusive jurisdiction to decide newly filed bankruptcy cases. In almost all of the 94 federal judicial districts, bankruptcy cases are “referred” to the bankruptcy court, a special unit of the district court. As a practical matter, most district courts have a standing order directing all bankruptcy cases to the bankruptcy court.
 
Second Court Level
When a bankruptcy court decision is appealed, the second level of courts is either the federal district court in the same district as the bankruptcy court, or to the Bankruptcy Appellate Panel. Only the First, Sixth, Eighth, Ninth, and Tenth Circuits have convened these panels, which are composed of bankruptcy courts judges from around the Circuit.
 
Third Court Level
The next level of bankruptcy appeals is to the United States Court of Appeals. The Court of Appeals is divided geographically into eleven judicial circuits. Circuit courts of appeals only decide bankruptcy cases filed within their own circuit.
 
Final Court Level
The “court of last resort” is the United States Supreme Court. The Supreme Court has over 10,000 appellate cases brought before it every year. Nine justices have little hope of being able to review each one, and thus have discretion to decide whether to take certain types of cases. Typically, the Supreme Court hears 75-80 cases a year, meaning that less than one percent of all appeals are actually reviewed by the Supreme Court.
 
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.

                                

"Big Three" Credit Reporting Agencies Agree to Reforms

Experian, Equifax, and TransUnion are credit reporting agencies (“CRAs”) that maintain consumer credit information on approximately 200 million consumers. The information in a consumer credit report is compiled by CRAs from submissions by banks, collection agencies, and other creditors. The consumer’s credit report is then sold by the CRA to companies who use the report to assess the consumer’s credit-worthiness.

 
This system of data collection commonly results in errors in a consumer’s credit report. A 2012 study by the Federal Trade Commission found that 26% of study participants identified at least one potentially material error in their credit reports, and that only 13% of study participants experienced a change for the better in their credit score as a result of modification to their credit report after a dispute to a credit reporting agency. These findings suggest that millions of consumers have material errors on their credit reports.
 
New York State Attorney General Eric Schneiderman recently announced a settlement with Experian, Equifax, and TransUnion after a three year investigation that may substantially change CRA processes. Many of these changes will be instituted nationwide. Provisions of the settlement include: 
 
1.Improving the credit dispute process by employing specially trained employees to review all supporting documentation submitted by consumers for all disputes involving mixed files, fraud or identity theft. Additionally, when a creditor verifies a disputed credit item through the automated dispute resolution system, the CRA will not automatically reject the consumer’s dispute. Instead, a CRA employee with discretion to resolve the dispute must review the consumer’s supporting documentation;
2.Establishing a six month waiting period before reporting medical debts on a credit report. Many delinquent medical debts are caused by delayed insurance payments or other disputes;
3.Promoting the federally mandated entitlement to one free consumer credit report from each CRA via AnnualCreditReport.com. The CRAs must include a prominently-labeled hyperlink to the AnnualCreditReport.com directly on the CRAs’ homepages or by a drop-down menu visible on the homepages;
4.Providing a second free credit report to consumers who experience a change in their credit report as a result of initiating a dispute; and
5.Removing medical debts from a credit report after the debt is paid by insurance.
 
The agreement allows these changes to be phased in over three years, but most of them will occur over the next six to 18 months.
 
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.

File Bankruptcy and Buy a New Car!

It may sound funny, but a new car purchase and a bankruptcy filing often go hand-in-hand. Bankruptcy reorganizes personal finances, and sometimes purchasing a new car is part of that reorganization. 

 
Chapter 7
In some Chapter 7 cases it may be advantageous for an individual to purchase a new car before filing bankruptcy. If the individual has a good enough credit score, it may make sense to purchase a new car since credit rates and terms may change after the bankruptcy is filed. 
 
In other cases it makes sense to purchase a new vehicle after a Chapter 7 bankruptcy filing. Individuals with very bad credit and outstanding debts may find that they are unable to finance a vehicle before filing bankruptcy. However, after the bankruptcy is filed, financing may be available. Why?
  • •The individual has resolved the outstanding debts;
  • •The individual’s debt –to-income ratio is usually low;
  • •The Chapter 7 debtor can only receive one Chapter 7 discharge every 8 years;
Some lenders will approve a new car loan immediately after the debtor files bankruptcy with the assistance of an attorney; others require that the debtor first attend the 341 meeting; and still others require that the debtor receive a discharge before approving a loan.
 
Chapter 13
Like a Chapter 7 debtor, an individual contemplating Chapter 13 bankruptcy may find that purchasing a new car before filing bankruptcy is in his or her best interest. A unique feature of Chapter 13 is the ability to “cram-down” many vehicle loans. In 2005, Congress (at the behest of big banks) stopped debtors from cramming-down vehicle loans to value unless the loan is older than 910 days (approximately two and a half years). However, many bankruptcy courts will allow a Chapter 13 debtor to cram-down the interest rate, and sometimes any negative equity from a trade-in that was rolled into the loan.
 
What this means is that if you purchase a new car before Chapter 13 bankruptcy, you may be able to use the bankruptcy laws to reduce the interest rate, the term (and pay up to five years), and in some cases strip off negative equity. Since success in Chapter 13 depends on predictable finances, controlling auto expenses and repairs in critical. As a side note, a new car purchase may also be attractive in situations where there is excess disposable income. The individual may be faced with an option of paying on a new car or paying unsecured creditors (like credit cards or medical bills).
 
A debtor may also purchase a new car during after filing Chapter 13 bankruptcy. A Chapter 13 bankruptcy is a three to five year repayment plan under the supervision of the federal bankruptcy court. Consequently, the debtor must have the approval of the bankruptcy court before incurring a new car debt. Obtaining Court approval can be difficult to navigate and always depends on the debtor’s financial situation.
 
Auto loans are often a large part of an individual’s finances. The individual’s automobile situation should be discussed and all options reviewed before filing bankruptcy. In many cases a purchasing a new car is a sound financial management.
 
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.
 

New Study Finds 1 in 6 NFL Players File Bankruptcy

To the chagrin of baseball fans, football has long been America’s Game. A recent Harris poll revealed that the National Football League, or NFL, is the favorite sport for 32% of sports fans, while baseball only garners “favorite” status among half as many Americans (16%).
 
Pro football is also the most lucrative sport with annual revenues estimated at $9.5 billion, and the average value of an NFL team currently valued at $1.43 billion, according to Forbes Magazine. Naturally, the players are compensated well, but the pay is not as good as you would think. Forbes reports that the average NFL player’s salary is “only” $1.9 million a year. Compare that to the average NBA (basketball) player salary at $5.15 million, MLB (baseball) player salary at $3.2 million, or NHL (hockey) player salary at $2.4 million. 
 
The playing careers for professional athletes are also skewed against the pro football player. According to RAM Financial Group, a large financial services group that caters to professional athletes, the average span for a professional athlete is: 
  • NFL:  3.5 years 
  • NBA: 4.8 years 
  • NHL:  5.5 years  
  • MLB: 5.6 years 
 
These numbers can be a recipe for disaster for the young professional football player. A new study published in the National Bureau of Economic Research reports that nearly one in six NFL players file for bankruptcy protection within a dozen years after leaving the sport.
 
Researchers collected data on roughly 2,000 players drafted by NFL teams between 1996 and 2003, then looked at earnings data and bankruptcy court records. Career earnings data were available for roughly 900 players.
 
“Players with median-length careers earn about $3.2 million in a few years. If they are forward-looking and patient, they should save a large fraction of their income to provide for when they retire from the NFL,” Kyle Carlson, Joshua Kim, Annamaria Lusardi and Colin F. Camerer wrote in a working paper released last month.
 
Instead, 15.7% of NFL players file for bankruptcy within 12 years of retiring from the league, with little difference based on career length or earnings. “Having played for a long time and having been a successful and well-paid player does not provide much protection against the risk of going bankrupt,” they wrote.
 
Few players file for bankruptcy while playing in the NFL. But filings gradually increase in the two years after retirement, “likely due to a combination of players rapidly drawing down limited savings and having leveraged investments.” The bankruptcy rate increases over time.

Car Title Loan Trap

Car title loans can be a problematic debt trap.  If you need money fast, then using your as collateral may be an option. If you take out a title loan, the lender will take your title and place a lien on your car in exchange for a short-term loan.  If you stop making payments on the loan, then the lender has the right to repossess your vehicle.

There are many disadvantages to this type of loan. First, the borrower does not have to meet any qualifications in order to receive a car title loan. All the borrower needs is a source of income and a vehicle in to receive a loan. Unlike many other financing options, the approval process for a car title loan is nonexistent and the borrower does not have to qualify for the loan. This procedure can be dangerous for borrowers who are already in a large amount of debt. The lenders do not base their approval process on your credit score, so acquiring a car title loan could produce more debt for the borrower. Second, the interest rates on car title loans have been known to exceed 100 percent. Short-term loans are expected to be repaid quickly. If the borrower is unable to make payments to the lender, then late fees and interest rates skyrocket causing the borrower to pay back more than they originally acquired. Third, the borrower is at risk of losing their vehicle. If the borrower is unable to make payments, then the lender has the right to sell the vehicle that was originally used as collateral.

If you decided that a car title loan is the best option for your current situation, then be sure to make your payments on time to avoid late fees and high interest rates. It is extremely important to read the fine print when signing up for a car title loan. By reading the fine print, you are better able to completely understand the terms and conditions so you are not caught off guard by hidden fees.