Archives for November 2014

Debtor Responsible for Accuracy of Bankruptcy Filing Regardless of Legal Advice

November 25, 2014 by TomScottLaw

#3 of 8 in Series — Previous Article #2: Debtor in Bankruptcy Must Disclose All Assets and Liabilities or Risk Severe Penalties
In the vast majority of consumer cases, assets are easily identifiable and can be listed and valued on schedules A and B with limited investigation. However, one asset that may be both difficult to identify and value is the debtor’s interest in any causes of action that he or she may have against a creditor or other third party.
In fact the debtor may not even realize that there is a potential claim, such as a creditor’s violation of the Fair Debt Collection Practices Act, or an action against a former employer for wrongful termination. The attorney’s failure to properly list an asset may bar the debtor from pursuing an action at a later time.
Yet bad legal advice does not relieve the debtor of the consequences of the incorrect filing. In the case Cannon-Stokes v. Potter, 453 F.3d 446 (7th Cir. 2006), Judge Easterbrook wrote:

“[a] lawyer is the client’s agent, and the client is bound by the consequences of advice that the client chooses to follow. Cannon-Stokes might as well say that she is free to ignore any contract that a lawyer advised her to sign with her fingers crossed behind her back. The lawyer’s role as agent is why the Supreme Court held in United States v. Boyle, 469 U.S. 241, 105 S.Ct. 687, 83 L.Ed.2d 622 (1985), that a taxpayer could not avoid paying interest and penalties occasioned by his lawyer’s mishandling of the return. Just so here: a debtor in bankruptcy is bound by her own representations, no matter why they were made, at least until the debtor moves to amend the disclosures and pay the creditors their due (a step that, to repeat, Cannon-Stokes has not taken). The remedy for bad legal advice lies in malpractice litigation against the offending lawyer.”

Let’s sum this up: Upon filing a bankruptcy under sec. 541, everything in the world you own, or are entitled to receive, belongs to, and is under the control of, the bankruptcy court until the court abandons that property and gives it back to you. The job of a good attorney is to know what you are allowed to keep, and advise you on that.
However, that does not absolve the debtor from any responsibilities, as they could be penalized for following bad advise from their attorney and subject to fines, revocation of the bankruptcy, and/or criminal charges.

Next Article in Series: Judicial Estoppel Normally Used to Prevent Conflicting Litigation

* Source: Cornell University Law School Legal Information Institute ** Source: Justia *** Source: OpenJurist

Disclosure required by 11 U.S.C. § 528(a)(3): We, the law office of Tom Scott & Associates, P.C., are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.

Debtor in Bankruptcy Must Disclose All Assets and Liabilities or Risk Severe Penalties

November 13, 2014 by TomScottLaw

#2 of 8 in Series — Previous Article #1: What Constitutes Property of the Estate in Chapter 13 Bankruptcy and What are the Consequences of Failing to Amend the Schedules?

Debtor Has Duty to Disclose All Assets and Liabilities at Start of Bankruptcy Case

Regardless of whether an asset is property of the estate or not, the debtor has a duty to disclose it. The Bankruptcy Code requires that a debtor disclose all of his or her assets at the commencement of the case. See Section 521* which states “[t]he debtor shall file … (B) unless the court orders otherwise, (i) a schedule of assets and liabilities. One Court has stated “Given the wide scope of § 541*, the debtor’s obligation to disclose all his [or her] interests at the commencement of a case is equally broad. Because full disclosure by debtors is essential to the proper functioning of the bankruptcy system, the Bankruptcy Code severely penalizes debtors who fail to disclose assets: While properly scheduled estate property that has not been administered by the trustee normally returns to the debtor when the bankruptcy court closes the case, undisclosed assets automatically remain property of the estate after the case is closed.” Chartschlaa v. Nationwide Mut. Ins.Co., 538 F.3d 116, 122 (2d Cir. 2008)** .

The bottom line is that every conceivable interest and future interest of the debtor, such as an anticipated tax refund, must be listed, including:

Non-possessory property, meaning not currently in your possession
Contingent, speculative, derivative investments
Any claim you may have against anyone else, for whatever reason, whether you think it’s collectible or not, whether you think it has value or not

Exempt Property and Assets Must Also Be Disclosed

One court has even found that exempt property loses its exempt status and remains property of the estate if the debtor has failed to disclose that exempt asset. In addition, simply amending the schedules after the fact may not be sufficient to cure an error. In the Yonikus case [974 F.2d 901 (7th Cir.1992)]***, the Debtor filed amended schedules B and C listing exempt property and claiming an exemption six years after filing his bankruptcy petition. The bankruptcy court denied the exemption, and the district court affirmed that ruling. The debtor’s position was that any nondisclosure of a potential workers’ compensation claim was not fraudulent, because he believed that he was not required to report totally exempt property. In citing, Payne v. Wood 775 F.2d 202,, 205 (7th Cir. 1985)**, cert. denied, 475 U.S. 1085, 106 S.Ct. 1466, 89 L.Ed.2d 722 (1986) the Court held, “[A]lthough amendments before discharge are liberally allowed it is most unlikely that the [debtors] would be permitted to amend. The [debtors’] omissions from the initial list suggest that they meant to hide assets if they could get away with it…. The operation of the bankruptcy system depends on honest reporting. If debtors could omit assets at will, with the only penalty that they had to file an amended claim once caught, cheating would be altogether too attractive. The omission of assets may be a good reason to deny or revoke a discharge.”

In other words, it is not up to the debtors, or their attorney’s, to determine if an asset has value, it is the job of the trustee. Even if the debtor believes an asset has no value, such as back rent owed by a tenant that skipped out that the debtor thinks is not collectible, it must be listed; the trustee will then determine its value.

Failure to Disclose Assets Can Lead to Bankruptcy Revocation and Criminal Charges

In a Chapter 7* setting, a failure to list assets may lead to a revocation of discharge pursuant to Section 727(d)* which states:

(d) On request of the trustee, a creditor, or the United States trustee, and after notice and a hearing, the court shall revoke a discharge granted under subsection (a) of this section if—

(1) such discharge was obtained through the fraud of the debtor, and the requesting party did not know of such fraud until after the granting of such discharge;

(2) the debtor acquired property that is property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee;

In addition to a revocation, concealment of property can also result in criminal sanctions under 18 U.S.C. § 152*. United States v. Cherek, 734 F.2d 1248 (7th Cir.1984), cert. denied, 471 U.S. 1014, 105 S.Ct. 2016, 85 L.Ed.2d 299 (1985). “Even if the asset is not ultimately determined to be property of the estate under the technical rules of the Federal Bankruptcy Code, Section 152 properly imposes sanctions on those who preempt a court’s determination by failing to report the asset.” Id. at 1254. Accord, United States v. Grant, 971 F.2d 799 (1st Cir.1992); United States v. Beard, 913 F.2d 193 (5th Cir. 1990); United States v. Jackson, 836 F.2d 324 (7th Cir.1987). Most importantly, your client may be precluded under the doctrine of judicial estoppel from bringing a cause of action that was not listed, valued and potentially exempted in the schedules.

This point is pretty self-explanatory; If the court determines that the debtor has acted fraudulently by trying to hide any assets, the bankruptcy can be denied and criminal charges can be filed.

Next Article in Series: Debtor Responsible for Accuracy of Bankruptcy Filing Regardless of Legal Advice

* Source: Cornell University Law School Legal Information Institute ** Source: Justia *** Source: OpenJurist

Disclosure required by 11 U.S.C. § 528(a)(3): We, the law office of Tom Scott & Associates, P.C., are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.

What Constitutes Property of the Estate in Chapter 13 Bankruptcy and What are the Consequences of Failing to Amend the Schedules?

November 3, 2014 by TomScottLaw

#1 of 8 in Series

Property of the Estate in Bankruptcy: Difference between Chapter 7 and Chapter 13

The goal of any chapter of bankruptcy is to try and settle debt with creditors. The difference between chapters 7 and 13 is how creditors go about looking for money. Ch13 is a wage-earner plan, in that you have a job and are making money or because you have assets you want to protect – that you don’t want liquidated, or because you want to deal with tax issues, or divorce issues, or to save a house, or to lower the payment on a car.

Chapter 13 is for when you have a job or assets you want to protect.

Bankruptcy Code has Broad Definition of Property

Section 541* of the Bankruptcy Code is very broad in its definition of “property of the estate” and states:

(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:

(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.

(2) All interests of the debtor and the debtor’s spouse in community property as of the commencement of the case that is—

(A) under the sole, equal, or joint management and control of the debtor; or

(B) liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor’s spouse, to the extent that such interest is so liable.

(3) Any interest in property that the trustee recovers under section 329(b), 363(n), 542, 550, 554, or 723 of this title.

(4) Any interest in property preserved for the benefit of or ordered transferred to the estate under section 510(c) or 551 of this title.

(5) Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date—

(A) by bequest, devise, or inheritance;

(B) as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree; or

(C) as a beneficiary of a life insurance policy or of a death benefit plan.

(6) Proceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case.

(7) Any interest in property that the estate acquires after the commencement of the case.

Basically, once you have file for bankruptcy, you don’t own anything; it all becomes property of the estate. The court, after looking at what you can keep, abandons certain property back to the debtor, and keeps the rest and sells it.
In a Chapter 7 bankruptcy, possessions are defined as property owned on the date the case is filed.
In a Chapter 13 case, the law states, “Not only does it include 541 properties, it also includes all property the debtor acquires after the case is filed, but before the case is closed, dismissed, or converted to another section.”

Property Includes All of Debtor’s Legal and Equitable Interests

The Seventh Circuit has defined the scope of Section 541 broadly stating, “When a bankruptcy petition is filed, virtually all property of the debtor at that time becomes property of the bankruptcy estate. Section 541 of the Bankruptcy Code defines ‘property of the estate’ broadly to include all of the debtor’s interests, legal and equitable. United States v. Whiting Pools, Inc., 462 U.S. 198**, 204-05 and nn. 8, 9, 103 S.Ct. 2309, 2313 and nn. 8, 9, 76 L.Ed.2d 515 (1983). ‘[T]he term `property’ has been construed most generously and an interest is not outside its reach because it is novel or contingent or because enjoyment must be postponed.’ Segal v. Rochelle,382 U.S. 375**, 379, 86 S.Ct. 511, 515, 15 L.Ed.2d 428 (1966) (bankruptcy estate includes right to refund). A debtor’s contingent interest in future income has consistently been found to be property of the bankruptcy estate. See In re Neuton, 922 F.2d 1379**, 1382-83 (9th Cir. 1990) (collecting cases). In fact, every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative, is within the reach of § 541 (emphasis added).” In the Matter of Yonikus, 974 F.2d 901** (7th Cir.1992).

Everything you own or are entitled to receive is property of the estate.
However, the bankruptcy code does allow you to get some of that property back, they can’t liquidate everything. Property of the bankruptcy estate is what the court is generally going to keep to pay money back to creditors, what they are going to try and sell.
Here’s how to look at it: If the court was going to sell everything, your clothes, your bed, your pots and pans, etc., and leave you with nothing, you’d have to buy some things to replace that property, it would be on credit, and you’d be right back where you started.

Property Does Not Include Specific Funds and Financial Assets

Note that property of the estate does not include assets that are specifically listed in Sections 541(b)-(c). Among other items, such property does not include funds in an education Individual Retirement Account (IRC §530(b)(1)) if those funds were placed in the account more than a year prior to filing, and subject to certain limitations. 11 U.S.C. §541(b)(5). Such property also does not include funds contributed pursuant to IRC §529(b)(1) for college tuition expenses, again subject to certain limitations. 11 U.S.C. §541(b)(6). The estate also does not include amounts withheld by employers from wages of the debtor, or received by the employer from the debtor as contributions, to ERISA plans under IRC §414(d), deferred compensation plans under IRC §457, or tax-deferred annuities under IRC §403(b). It also does not include amounts contributed by the employee to health insurance plans regulated by state law. 11 U.S.C. §541(b)(7)(B). Spendthrift trusts enforceable under Indiana law would not constitute property of the estate. 11 U.S.C. §541(c)(2).

For your fresh start, the bankruptcy court allows individual consumers to keep certain items, including:

Any Retirement account (IRA, 401K, PERF)
Up to $17,600 of equity in your house (as a married couple, that would double to $35,000)
$9,350 of personal tangible property
$700 of intangibles ($350/person), which can include:
- cash
- stocks and bonds
- lawsuits settlements
- accounts receivable
- anticipated tax refund
- inheritance
- life insurance with a cash surrender value
- investments

Next Article in Series: Debtor in Bankruptcy Must Disclose All Assets and Liabilities or Risk Severe Penalties

* Source: Cornell University Law School Legal Information Institute
** Source: Justia

Disclosure required by 11 U.S.C. § 528(a)(3): We, the law office of Tom Scott & Associates, P.C., are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.