Sunday, February 25, 2007

First Circuit B.A.P. Issues Disposable Income Decision

The First Circuit Bankruptcy Appellate Panel has issued its decision in re Kibbe affirming the bankruptcy court's determination that actual anticipated income instead of the historically income found on the B22C form shall be used to determine disposable income in Chapter 13 cases.

Thursday, February 15, 2007

Judge Hillman Rules No Fraudulent Conveyance in Divorce Transfer

In the recent case of In re Prichard, 2007 WL 458021 (Bankr.D.Mass., Feb 12, 2007) Massachusetts bankruptcy judge William C Hillman found in favor of the debtor in a fraudulent conveyance action brought by the trustee. Mr. Prichard had owned a house with his ex-wife which he transfered to her alone pursuant to a separation agreement incorporated into a judgment of divorce. The case was brought under the old Massachusetts version of the Uniform Fraudulent Conveyance Act which was repealed in favor of the Uniform Fraudulent Transfer Act in 1996. However, much of the reasoning in the case applies under both laws. In the actual-fraud prong of the trustee's case, he alleged that the debtor had an actual intent to hinder, delay or defraud creditors when he made the transfer. This sort of allegation requires an examination of the indicia or so-called "badges" of fraud. My guess is that the trustee brought this case because after the divorce the debtor moved back in with his ex-wife. His wife testified that this was not a "normal situation" but it also appears from the testimony that the couple did not resume a married lifestyle but merely carried on a civil co-existence. The judge stated: "I could conclude that the Trustee met his initial burden of demonstrating actual fraud under § 7 of the UFCA simply because Thomas conveyed his property in favor of a family member over his creditors." The court then went on to find additional badges of fraud that solidified its conclusion that the trustee had met his initial burden. The issue then became whether there was "sufficient evidence of a legitimate supervening purpose for the transfer of the Property, such as to rebut the indication that [the debtor] effected the transfer of the Property with fraudulent intent." The judge declined to find that the marital difficulties leading to the transfer were a sham, stating that at "at the time of the transfer, Thomas did not retain any interest in the Property, but transferred his interest in it to [his ex-wife] who assumed complete responsibility for the Property and household's upkeep. To conclude now that this transaction was some sort of sham would require that I find that [the debtor and his ex-wife] staged their marital difficulties, while Thomas set up separate residences in 1989 and for the five years following, with the full intention of eventually returning to live in the Property in 1994. The evidence does not so prove and I do not so conclude."

Tuesday, February 13, 2007

The New Two Year Exemption Rule

I recently posted something about the new two-year bankruptcy exemption rule on the Bankruptcy Law Network site. The provision is found at 11 U.S.C. 522(b)(3)(A). Here's an example of how that rule works as applied to a hypothetical Massachusetts bankruptcy debtor. Let's say the hypothetical debtor has lived in Massachusetts for the past year, lived in Vermont for the year before that, and before that lived in Florida for five years. The Massachusetts resident files bankruptcy. Because the debtor did not live in the same state for the entire two-year period before the filing it is necessary to go back and look at the 180 day period before the two-year look-back period. During that time the debtor lived in Florida. So Florida's state exemption law applies. This means that the debtor has Florida state law exemptions to utilize; but it also means that Florida's opt out provision applies, rendering the federal exemptions unavailable. These federal exemptions would normally be available in Massachusetts, but here the only exemption law available would be what exists under the state law of Florida and under federal nonbankruptcy law.

Thursday, February 8, 2007

New Bankruptcy IRA Exemption

I have written a brief description of the new bankruptcy IRA exemption on the Bankruptcy Law Network site. The entry pertains to the one million dollar IRA exemption under the federal bankruptcy exemptions. Here in Massachusetts we are fortunate enough to be able to choose between the Massachusetts and federal exemption scheme in bankruptcy. The new bankruptcy IRA exemption will impact those choosing the federal exemptions, but those who must chose our state exemptions (because of a valuable homestead, for example) the state law IRA exemption is still available. Mass.Gen.L. ch. 235, § 34A exempts IRA account to the extent that the balance of the account does not exceed seven percent of the individual's total income within the five years preceding bankruptcy.

Wednesday, February 7, 2007

Communicating with Debt Collectors -- Cease and Desist Letters

You do not have to talk to debt collectors. Unfortunately, this is something of a secret. Many consumers, when contacted by pushy, aggressive debt collectors, believe that they have no choice but to talk to them. This is at least partly because communicating with a debt collectors often involves a barrage of threats -- of arrest, wage garnishment, property seizure, lawsuits, etc. Many of these threats are false and unlawful (you can read more about false threats here). However, regardless of the tenor of the conversation, you have the ability to end it and block further ones. The Fair Debt Collection Practices Act, 15 U.S.C. 1692 et seq., ("FDCPA") contains the following provision:

If a consumer notifies a debt collector in writing that the consumer refuses to pay a debt or that the consumer wishes the debt collector to cease further communication with the consumer, the debt collector shall not communicate further with the consumer with respect to such debt....

15 U.S.C. 1692c(c).

There are three exceptions. After receipt of a cease and desist letter, a debt collector can advise you that further collection efforts are being terminated, notify you that it will invoke specified remedies which it ordinarily invokes, or notify you that it intends to invoke a specified remedy.

Those legalistic exceptions aside, cease and desist letters can be quite useful. However, you must send the letter directly to the debt collector certified mail return receipt requested. Cease and desist letters are only effective upon receipt and the only practical way to prove receipt is with that U.S. Postal Service green return receipt card. If you are contacted again by a debt collector who has received your cease and desist letter, you have the right to sue under the FDCPA and recover statutory damages, actual damages, reasonable attorney's fees, and the costs of suit.

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Saturday, February 3, 2007

Judge Hillman Declines to Approve Settlement of Objection to Discharge Case

In the case of In re Streck, In re Streck, Slip Copy, 2007 WL 268552 (Bankr.D.Mass., Jan 25, 2007)(NO. 03-11241-WCH, 03-1103), a creditor objected to the discharge of the debtor under Section 727 of the Bankruptcy Code. The court does not specify which subsections of Section 727 were invoked by the creditor but stated that the case had been "extremely contentious and more than slightly uncivil." An objection under Section 727 aims at the denial of a debtor's entire discharge whereas an objection under Section 523 seeks the more limited remedy of an order declaring a certain debt nondischargeable. The parties had proposed that the 727 action be dismissed in exchange for the debtor paying money to the objecting creditor. The issue in this case is whether the Court would approve the settlement where the whole benefit would go to the objecting creditor instead of the bankruptcy estate. The Court stated: "I will adopt the standards set out in Judge Brown's decision, Wolinsky v. Maynard (In re Maynard ), 273 B.R. 369 (Bankr D. Vt. 20002). In applying those factors, I conclude that the proposed settlement does not satisfy the last factor, 'that principles of equity and fairness would be furthered by approval of the proposed settlement,' Id. at 372. I so hold because all of the consideration being paid by Debtor (and his spouse) goes directly to Plaintiff and not to the estate." One lesson here is that a creditor should think twice before pleading a Section 727 count when their real goal (which is almost always the case) is to obtain a settlement only to their own benefit. Creditors like to plead under both Sections 523 and 727 when filing objections to discharge and dischargeability because they believe it gives them leverage (they can bargain away the 727 count in exchange for a favorable settlement on the 523 count). This decision should give them pause.

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