Homesteads, Trusts, and Exemptions, Study Guides, Projects, Research of Commercial Law

Download Homesteads, Trusts, and Exemptions and more Study Guides, Projects, Research Commercial Law in PDF only on Docsity! Bankruptcy Outline us.docsity.com I. Homesteads, Trusts, and Exemption Planning a. Homestead Exemptions i. The homestead = the real property occupied by the debtor as a residence. ii. Texas & Florida = unlimited homestead exemptions iii. Some states have no homestead exemption. iv. TBE 1. A married couple is a single indivisible entity. Neither person can alienate the property without the participation and consent of the other. 2. Creditors of 1 cannot get at TBE property. 3. However, they can get to it if you have joint debt. To maximize the value of TBE à do not incur any joint debts. 4. There is not a presumption that property is held as a TBE, you must intend to hold property like this. b. Exemption Planning i. Reed, p. 199 1. (Texas) Debtor sold ass his assets and dumped the proceeds into a homestead. A few weeks later, he filed Ch. 7. The b-ct found that this was not a fraudulent conveyance. 2. On appeal for the 5th Circuit: Ct found that even though it was not a voidable conversion, § 727 permitted the court to deny the Ch 7 discharge. 3. So the debtor kept his house, but also kept the debts. 4. 2 possible grounds: a. Ct does not have to grant a discharge if the debtor, with intent to hinder, delay, or defraud a creditor by transferring or converting property within a year before the date of filing. § 727(a)(2) b. Ct does not have to grant a discharge if the debtor, failed to explain satisfactorily any loss of assets or deficiency of assets to meet liabilities. § 727(a)(5). ii. § 522(o) 1. The homestead protection will be reduced by the dollar amount that is attributable to otherwise non-exempt property that the debtor disposed of with intent to hinder, delay or defraud a creditor. 2. “Disposed of” – does not include making ordinary mortgage payments. 3. There is a 10-yr reach back period. 4. This overrules Havoco (in bankruptcy) can still use it in FL. iii. Bad Guy Limit on Homestead: § 522(q) 1. Certain bad guys (securities fraud, RICO violations) have a limit on the homestead. 2. Puts an absolute cap on the homestead for people who were convicted of certain crimes. iv. Advising your client on Exemption Planning 1. See problem 9.2, p. 217 2. There are ethical problems involved in advising a client about each piece of property because a lawyer shall not participate in a fraud. 3. A lot of lawyers will not advise people on asset protection. 4. Lawyer should make sure that the debtor is not having any problems with creditors before giving advice. 5. Lawyer may advise a client in line with Havoco in Florida because it is permitted under state law. However, if the client is going to file bankruptcy, then it would be very bad. Bankruptcy Outline us.docsity.com c. Unlimited Exemptions and Asset Trusts i. Asset Protection Trusts 1. Transfer all your assets into a trust, name yourself as both trustee and beneficiary. You can keep on using the property. 2. If you do something bad, a creditor cannot get to the property, because technically its property of the Trust. 3. Some states are making the trusts legal and also make them available to out of state residents. 4. This is a way for states to attract assets to their state. 5. Alaska & New Hampshire: N. Hamp: expressly says that creditors can get the assets if the debtor is using the trust to hinder, delay or defraud creditors. 6. If you don’t have an imminent credit problem, then you are ok to create this trust 7. Particularly attracts doctors who want to stop paying malpractice insurance ii. Offshore Trusts 1. Established in the Cook Islands or the Cayman Islands 2. The trusts become unresponsive to the settlor’s instruction if those instructions are the product of coercion. (such as by a federal judge) iii. In bankruptcy, the debtor will claim the property in such a trust is not property of the estate per § 541(c)(1). iv. 2005 Amendment’s Effort to Get these Assets: § 548(e) is a 10 yr reach back for transactions made with intent to hinder, delay or defraud creditors. It is tricky to determine intent. d. Moving to Better Exemptions i. Must live in a state for 2 years to use their exemptions ii. If you haven’t lived their for 2 years, look to the state where you lived 6 months before that iii. §522(b)(3): must live in a state 730 days to claim that state’s exemptions 1. And, if you don’t, it is the place where you lived for 180 days prior to the 730 day period. 2. However, most homestead exemptions only apply to property in the state iv. If, due to the requirements, you can’t get domicile, then, you use federal exemptions. v. §522(p) 1. Aimed at people who move from one state to another 2. Limits homestead 3. Problems with the mansion loophole: people move to FL to take advantage of the exemption. 4. It limits to 1215 days prior to bankruptcy. 5. Do get credit for rolling over the value of your homestead in the same state 6. This deters people from moving states. vi. Determining which State’s Law Applies: Problem 9.1, p. 217: K has lived in Chicago for 5 yrs, except for a period about 2.5 yrs ago when he rented in apartment in Texas for 91 days and a period last year when he moved to Wisconsin for a couple of months. Q: can he keep his condo in Chicago? 1. § 522(b)(3)(A): to determine what state’s law applied, you must look to the state in which the debtor has lived for the last 730 days (2 yrs) prior to the filing. But if the debtor moved during that time, then you look at Bankruptcy Outline us.docsity.com 1. While § 502(b) allows for pre-petition claims, § 506 allows for certain post-petition claims and collection rights of secured creditors. 2. A secured creditor has an allowed claim up to the value of its collateral. § 506(a)(1). a. If the claim is less than or equal to the value of the collateral, then the entire claim is secured. b. If the claim is greater than the value of the collateral, then the claim is “partially secured” and the remaining portion of the initial claim continues as an unsecured claim against the estate. 3. The Value of the Collateral § 506(a)(2) a. This applies to consumer ch 7 & 13 cases b. The value of the collateral is determined by its replacement (retail) value ii. Interest §506(b) 1. If the secured creditor is over-secured (if the value of the collateral exceeds the pre-bankruptcy debt – including pre-bankruptcy interest) then the secured creditor can receive post-bankruptcy interest at its contract rate, until the value of the collateral is exhausted. 2. Thus, if you are over-secured, you will get post-bankruptcy interest. iii. Attorneys’ Fees 1. attorneys’ fees incurred prior to the filing of the bankruptcy petition are treated the same as pre-petition interest: if a creditor, secured or unsecured, is entitled to pre-petition attorneys’ fees by contract or state law, then the fees are part of the creditor’s secured or unsecured claim 2. Secured creditors who are oversecured are entitled to post-petition attorneys’ fees until the total claim exceeds the remaining value of the collateral. iv. Exemptions: 1. Valid, unavoidable consensual security interests trump exemption claims. 2. A debtor may claim only an exemption in the “equity,” the value remaining after the secured creditor has been paid in full. e. Post-Petition Claims i. These are the expenses of administration that accrue after filing ii. Treated as a priority claim under § 507. iii. § 503 tells you what an administrative claim may be. The main issue is determining what is “necessary” to “preserve the estate.” f. PS. 10, p. 227 i. 10.1 1. Unsecured creditor: a. $3,000 b. $200 past-due interest accrued prior to bank c. $100 interest accrued since filing 2. Answer: The amount allowed under § 502 = $3,200 a. Unsecured creditors are not allowed post filing interest. ii. 10.2 1. C has 2 non-exempt assets: car @ $10,000 & stock @ $15,000 2. Bank has secured interest in car: a. $8,000 principal b. $500 pre-filing interest c. $400 post-filing interest d. $1,000 attorneys fees Bankruptcy Outline us.docsity.com e. This totals: $9,900 3. Bank entitled to collect all amounts under its agreement & state law 4. Answer: bank’s allowed secured claim under §§ 502, 506(a), (b) = $9,900. a. The bank is over-secured. This means the value of the collateral exceeds the debt. The bank has a secured interest up to the value of the collateral. b. Since the bank is over-secured, the post-bankruptcy interest continues to accrue as part of B’s secured claim. So does attorneys fees because the k calls for it. c. The remaining $100 goes back into the estate. d. Because the value of the collateral is determined by its retail value, § 506, the creditor gets the benefit of the higher value in this situation. iii. 10.3 1. If the car only could be sold for $5,000: a. The bank is under-secured. b. The $5,000 is a secured claim c. The difference is an unsecured claim and includes: i. $3,000 principal ii. $500 pre-filing interest iii. Not entitled to post-filing interest iv. Idk about attorneys fees v. This totals: $3,500 in an unsecured claim 2. The attorneys fees: a. We don’t have enough information here to know if they will be included. b. It depends on whether they are pre- or post-bankruptcy fees. c. Pre-bank fees are allowed, but post- are not. 3. Reality: the TIB would likely abandon the car to the bank, thus satisfying the debt to the bank. iv. 10.4 1. Give $5k to the bank as part of the secured claim. 2. Unsecured Claims: a. $4,500 = bank’s unsecured claim b. $20,000 = 10 unsecured creditor’s claims. c. Total = $24,500 in unsecured claims 3. There is $15,000 in unencumbered assets a. This is distributed to the unsecured claimants b. Works out to a little over $0.60 on the dollar. ($15k / $24.5k = $0.62) g. Priority Among Unsecured Creditors § 507 i. § 725 à gives us the notion that secured claims need to be paid in full first. ii. § 726 à Tells us how to distribute the property of the estate: 1. (a)(1): The § 507 Priority Claims are distributed first. 2. (a)(2): Allowed unsecured claims that are timely filed are distributed second. 3. (a)(3): Allowed unsecured claims that were not timely filed are distributed third. 4. (a)(4): Fines and penalties on any allowed claim are distributed fourth. 5. (a)(5): Post-bankruptcy interest is distributed fifth. 6. (a)(6): The remainder goes back to the debtor. Bankruptcy Outline us.docsity.com iii. Trustee has incentive to find and distribute assets b/c TIB gets paid a part of what he distributes. iv. The § 507 Priority Claims 1. First Priority à Domestic support obligations are first priority claims. § 507(a)(1) 2. Second Priority a. Certain administrative expenses (those allowed under § 503(b)) are second priority claims. § 507(a)(2) b. E.g. utility bills incurred by the estate following bankruptcy; insurance premiums for insurance on the non-exempt personal property prior to its sale by the TIB; costs of sale of non-exempt real estate and personal property, including advertising. c. This means that support obligations are before trustee claims. There will be a disincentive for TIB’s to do work for a debtor with big support obligations i. Solution: TIB can get paid his share of money that goes to support (but TIB won’t get paid in full until after the support obligation is fulfilled). § 507(a)(1)(C). 3. Fourth Priority a. Back wages is a 4th Priority Claim. § 507(a)(4)(A) b. 2 Limitations: i. Wages must be earned within 180 days of filing 1. limitation because at some point you are stupid if you continue working without getting paid. ii. Ceiling for each individual or corporation = $10,950 1. ceiling exists because of CEO’s high salary c. The tax withholdings owed to the government from a back wage paycheck will also have a 4th priority claim. 4. Seventh Priority a. Down-payments on consumer goods are a seventh priority claim. § 507(a)(7). b. E.g. down-payment on a tractor lawnmower 5. Eighth Priority a. Taxes are 8th Priority Claims. b. Income Taxes. § 507(a)(8)(A) i. Same “after/before” language of property taxes. See below. ii. Income taxes priority can go back 4 years. iii. The last day to pay without penalty = 4/15. c. Property Taxes. § 507(a)(8)(B) i. Language: “A property tax incurred before the commencement of the case and last payable without penalty after one year before the date of the filing of the petition” ii. Translation: To owe the tax, the tax must be assessed before filing AND must have been last payable after the time that was one year prior to filing. 1. Typically – government can get 2 years worth of property taxes. iii. The tax itself is the priority, but penalties are not a priority. Bankruptcy Outline us.docsity.com a. There was no reasonable reliance by the bank since it did not investigate the red flags which included the large stated incomes by the debtors vi. Student Loans 1. § 523(a)(8) – A chapter 7 bankruptcy does not discharge an individual’s student loan obligations unless excepting the debt cause undue hardship to debtor & debtor’s dependents. (A very hard test to satisfy). 2. The Brennar Test will be applied to justify a discharge of student loans. Gerhart, p. 236 a. Looks to the undue hardship issue; student loans are non- dischargeable unless you can show undue hardship (a difficult standard); debtor had $77K student loans; worked as cellist and lived modestly; creditor wanted $1000 of his $1200 monthly paycheck b. TC said undue hardship, but higher court didn’t buy it c. Brennar 3 Prong Test to justify discharging student loans for undue hardship per § 523(a)(8): i. Debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for himself and his dependents if forced to repay the loans; 1. yes – here, his monthly expenditures were reasonable and they exceeded his monthly income ii. Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period; and 1. He has other ways that he could make income and when he is not playing in the orchestra, he collects unemployment. 2. So nothing indicates his situation will persist. 3. He fails to demonstrate the type of exceptional circumstances that are necessary to meet his burden. iii. Debtor has made good faith efforts to repay the loans. 1. Here, the debtor did not make a good faith effort. 3. § 105 may be used to partially discharge student loans if Undue Hardship is also found under the Brennar Test. In re Miller, p. 238 a. Another student loan debt; owed a crap load; low paying job b. Here, the court was more flexible & sympathetic than in Gerhardt. c. Bankruptcy Court didn’t find undue hardship. i. Bank Ct relied on its § 105(a) powers to partially discharge her loans. ii. § 105 is very general. iii. Ct can basically do anything “to carry out provisions of this title” d. Decision reversed i. Ct said: you can use § 105, but you have to also find under the Brennar Test that it would be an undue hardship to have to pay back all the debt. ii. Because the debtor was not working in a job on the same level as their ability (PhD student) they were not making any effort to repay. Bankruptcy Outline us.docsity.com e. Does § 105 authorize B judge to whittle down the debt? cases are deeply split b. Tax Priorities and Discharge i. § 523(a)(1)(A) – an unpaid portion of taxes specified in § 507(a)(8)(A) – (G) is exempt from discharge ii. Pre-petition interest on § 507(a)(8) priority claims 1. Shares the priority of the claims themselves and also won’t be discharged. 2. Think of the pre-petition interest as part of the tax. iii. Post-petition interest does not accrue on unsecured tax claims against the TIB and the property of the estate, § 502(b), but post-petition interest does accrue against the debtor as to any unpaid, undischarged tax debts that survive bankruptcy. iv. Penalties on nondischargeable taxes are also nondischargeable, § 523(a)(7), even though such penalties do not get priority in payment under § 507(a)(7). 1. ie: the penalty is dischargeable only if the related tax is dischargeable. v. The IRS has the right to satisfy these tax debts by seizing property that is otherwise exempt under state law. vi. Advice: pay your taxes, if nothing else. c. No Discharge and Bankruptcy Crimes i. Certain bankruptcy specific actions are made crimes under §§ 151 – 155 ii. Denial of discharge is one form of discipline. iii. Prison is another. iv. The instance of the Farmer, p. 248 1. He should not have lied in b-court. Its perjury. 2. Unfortunately, the judge had no choice/discretion