Bankruptcy Petition Filed in Bad Faith

Can’t help myself. I have to share this.

I’m on an email list where I get all sorts of updates concerning bankruptcy law. My email this morning brought me news of a North Carolina bankruptcy court decision where the case was dismissed as having been brought in bad faith. What was the bad faith?

It seems that the petitioner, a woman who had just finished a divorce process, was filing the petition in bankruptcy primarily to make her attorney fees for the divorce go away. Through the divorce process she had obtained exempt assets in excess of $250,000 in value; and the lawyer’s bill was about $42,000; but the lawyer had already expressed a willingness to settle for $20,000.

The court appears to have reasoned that as this person went ahead with her contentious divorce, the lawyer had a reasonable expectation to be paid from the “equitable distribution recovery” of assets in the divorce case, and the filing of bankruptcy right after the divorce was in bad faith.

This is an example of what I hear referred to as the “smell test.” There is probably no specific provision in the bankruptcy code that says you can’t list your attorney fee bill in a bankruptcy right after the divorce. But under these particular circumstances, the bankruptcy court judge clearly did not like the way it smelled.

I have had several clients who have listed attorney fees in their bankruptcy petitions. However, that was not the only debt they had and that was not the reason why they filed. In addition, there had been a respectable period of time that had passed since the divorce was final; and it would have been something my client felt bad about and only listed because my advice was that all debts had to be listed.

Typically I find that my clients are very reluctant to list a debt that was for a personal service, where they have a relationship with the provider of the service. They really hate to list their doctor, dentist or plumber. If they need a bankruptcy, however, there’s no choice. All debts must be listed.

Creeping Debt and Chapter 13 Bankruptcy Debt Limits

Not long ago it seemed that $20,000 of credit card debt was a lot. I would file a bankruptcy for a person who had that without giving it a second thought. Now, however, as things go in my world, that’s not a lot of debt for most people. Unless the debtor is sick, disabled or hopelessly low income, I would be reluctant to file for someone with such a small debt.

What’s happening is that I rarely see anyone who’s not more than $50,000 in debt, and over $100,000 of consumer credit card debt is common. Once the total of the debt tops $100,000 I tend to ignore how much higher it goes, as my software keeps a running tally of the total. The fact is that for me, and I’m afraid for the whole country, the amount of credit card debt that seems normal is creeping steadily upward.

So the other day when I was reading my mail on a bankruptcy lawyer listserve, I had a bit of a start. One of the emails reminded me that for a Chapter 13 bankruptcy, there is a limit as to how much debt one is allowed to have. I quickly pulled out the most recent Chapter 13 I had filed and checked the balances of the debts, to make sure we had not exceeded the legal limit. Up until that moment it never occurred to me that one day someone will probably walk into my office with consumer debts in excess of the Chapter 13 limits. All of a sudden, those limits don’t seem as high to me as they used to. A lawyer who files a case where the limits are exceeded is subject to sanctions. If I did that it could cost me thousands of dollars. I must start paying more attention to those limits.

In order to qualify for a Chapter 13 bankruptcy, the person’s secured debt must not exceed $1,010,650 and the unsecured debt must not exceed $336,900. The way things are going right now, I would not be surprised to meet someone within the next week whose debts are over those limits. From my perspective the current economic downturn has been frightening and unbelievable.

I don’t mean to imply that I have never met a person with debts that high. Back in the early 1980s, during a serious recession we had in those years, I did a Chapter 7 bankruptcy for a real estate developer who had gone out of business and who had millions of dollars in debt. There’s no limit to the amount of debt you can run through a Chapter 7. I have also done Chapter 7 work for small business owners who’s debts would have exeeded the Chapter 13 limits.

But now people I see with consumer debt are actually starting to push those Chapter 13 limits, and that is something I have never seen before.

Bankruptcy and DWI, Judge Arrested

I have been practicing bankruptcy law and DWI defense for some time now, and it always seems a bit difficult to explain why those two areas of the law seem to mesh for me. So when I saw a story about a bankruptcy judge being arrested for DWI, I woke up and took notice.

Massachusetts bankruptcy judge Robert Somma won’t be returning to his job. Why? He has “agreed” to leave his job to pursue other endeavors. Seems he has been off work since his arrest for DWI in February. When I first read the headline I was surprised, because lots of public officials get DWIs. At least one of the Hennepin County judges currently on the bench has received a DWI while in office. They have to take their punishment, but they are not removed from their jobs.

There were other complications in Judge Somma’s case, however. Seems that when he was arrested, he was wearing a dress. That in itself, while a bit unusual, doesn’t seem to be justification for losing his job either. Apparently he was a good judge and well liked by those who practiced in his courtroom. There’s nothing illegal or unethical about wearing a dress that I know of, although I suppose I have to concede that it could have been inappropriate.

Here’s a link to the Boston Globe story.

Debtor Audits in Bankruptcy Cases Resume Today

My email today brought me a notice that the U.S. Trustee’s office is resuming debtor audits as of today. They stopped in January because Congress didn’t fund it.

An audit in this context involves the U.S. Trustee’s office hiring an outside accounting firm to go over the debtor’s records. Previously the policy was that one in 250 cases would randomly be audited. Now the policy is one in a thousand will be audited. That’s a 400% improvement, but I’m still sad to see this stuff starting again.

Minnesota Bankruptcy: The Income Limits

Since the passage of the “new law” in October of 2005, there have been rules based on level of income about who can file a Chapter 7 Bankruptcy. Unless you are at or below the median income for the State of Minnesota based upon your family size, you can only file a Chapter 7 if you pass the so-called means test. The means test is a whole other topic, which I will have to deal with some other time. For now, however, here’s a video I posted recently on Youtube where I discuss the median income levels for Minnesota by household size.

The numbers are subject to change every few months, but I have them posted on my site on my Chapter 7 page under the subheading of “Qualifying for Chapter 7 in Minnesota.”

David J. Kelly, Attorney
Kelly Law Office
1013 Ford Rd.
Minnetonka, MN 55305
952-544-6356
http://www.mn-bankruptcy.com/
http://www.mn-dwi.com/
http://www.kelly-law.com/

Bloviating about Short Sales on Youtube

The topic of short sales is hard to understand, and also hard to explain. In this video I spoke without a script, which I think was a mistake. I was trying to be clear, but I don’t think I got close to that goal. If I would have written a script first, it would have read about like what follows.

The term “short sale” can mean that:

1) The mortgage company will accept less than full payment and will release both the property and the debtors from the remaining balance of the debt; or

2)The mortgage company will accept less than full payment of the debt, will release the property from the mortgage, but will NOT release the individual debtors from the remaining unpaid balance of the debt.

I hear from lots of people who are trying to do a short sale, but don’t know which one they are trying to do or which one they want to do. The first kind leaves you in the clear, but the second variety brings you into my office in need of a bankruptcy.Most short sales are of the second variety, and they are worse than just doing nothing and letting the bank foreclose. Worse yet, often the realtors and mortgage companies involved in these transactions seem to purposely keep the sellers/debtors in the dark as to exactly what kind of deal it is.

If you are doing a short sale, you better consult an accountant about the tax consequences. Under certain circumstances, the amount of the debt forgiveness can be taxable income.This video and these comments are for general information purposes only and are not intended to be legal advice. Viewing these materials does not create an attorney-client relationship. I recommend that you consult the attorney of your choice concerning the details of your case.

David J. Kelly
Kelly Law Office
952-544-6356
http://www.mn-bankruptcy.com/

Fraudulent Federal Subpoena Email

This morning I received an email which purported to come from the federal court in San Diego. It appeared to be a subpoena requiring that I appear in federal court May 9th in San Diego before a grand jury.

It also contained a link which I assume would have downloaded a virus onto my computer.

I called the court in San Diego and they confirmed that it’s a hoax. I have also spoken with a lawyer a the law office that is mentioned on the false document. He tells me all they have done there all morning is sit on the phone answering questions about the email. I lost a little time on it, but it’s really messing them up. So in case you get it, now you know.

Lots of court time this week – sorry if I missed your call

I had some unexpected court time this week, especially yesterday. When that happens, my usual discipline of keeping up with returning calls and responding to emails goes to heck. I’ve made an effort to get back to everybody before saying I’m done for the week – which I am – but if I did not get back to you, please call me or email me again.

I usually am pretty good about actually looking at what my spam filter catches before I delete that mailbox, but on a week like this one I may have been more likely to miss a real message that got caught there. If I did not respond to your email, please send me another one.

CREDIT CARD CASH ADVANCES TO PAY FOR BANKRUPTCY

I just got off the phone with a gentleman who is in extreme debt, lives with his parents, and is essentially unemployed. He works part time odd jobs from time to time. His credit is apparently still good, since he is borrowing from one card to pay for another, even though his debt exceeds $50,000. I told him that he certainly qualifies for a Chapter 7 Bankruptcy, and probably needs one; but with no income and no assets, what was his plan to pay for the bankruptcy?

“I have been told that I can do that with cash advances,” said he without hesitation. I questioned him more trying to determine exactly who had said that or where he got that idea. He side-stepped and never really answered my questions. I explained that if a lawyer had told him that, it was a violation of every code of ethics I ever heard of. It would also be fraud if not theft, and if it preceded the actual filing of a bankruptcy, it would also be bankruptcy fraud. Bankruptcy fraud, I explained, is a federal felony. It is investigated by the FBI. I would like to stay as far away from that sort of thing as possible.

I would not have thought much of this call, and would not find it worthy of mentioning, except that this was the second such discussion I have had in the last ten days or so. Since it has now come up twice, I am wondering if someone on a web site, blog or other media source has been either promoting or at least discussing the idea.

Let me see if I can spell something out. If a creditor can show that a debt was incurred at a time that the debtor intends to not pay it, but intends instead to run it through a bankruptcy, that is bankruptcy fraud. The person who does that will at least be subject to an objection to the discharge brought by the creditor, and at worst possibly be subject to criminal charges. If the debt is more than $600 or so, and it is incurred within 90 days before filing, it will be presumed to be for luxury goods – which also makes the debt nondischargeable if the creditor objects. Even if all the specific rules for the bankruptcy filing are satisfied, there is still a possibility that the case won’t pass the “totality of the circumstances” test. Essentially it’s a smell test. If it doesn’t smell right, the court can dismiss it.

Bankruptcy "Abuse" Wasn’t There; Today’s Falling Stock Market

I am looking this afternoon at an October 15th article in the Duluth News Tribune. A bankruptcy lawyer I know has posted it on a local bankruptcy list serve to which I subscribe. The headline, “Bankruptcy filings are on the rise” is not really news to me. But one of the sub-headings in the article really caught my eye: “ABUSE WASN’T THERE”

The article rehashes how the credit and banking industry had lobbied for passage of the 2005 new legislation on the theory that a large number of people had been “abusing” the bankruptcy system. But then it takes a closer look at the filings under the new law, especially the ratio between Chapter 7s – which is where most of the abuse was supposed to have been happening – and Chapter 13s – which are preferred by the banking industry. They note that the ratio between 7s and 13s is the same now as it was in 1999. That ratio together with quotes from a credit counselor at Lutheran Social Services seems to support the proposition that the perceived “abuse” never actually existed.

In fact, judging by the whipping that some of the banks and credit card companies seem to be taking in the stock market today, it seems clear to me that a great deal of irresponsible behavior – abuse if you want to call it that – was engaged in by the bankers and lenders themselves. At the time of this writing, the Dow is down 192 points; and it’s been dropping for several days in a row. It is my hope that our economy can absorb the shock that is being expressed in today’s market, but I’m not at all sure that we won’t wind up in a recession. If it happens, I don’t think it will be the consumers who will be to blame.

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