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.

Out of the office until May 21st.

I’m am on my way to Hollywood. That’s where the National Association of Consumer Bankruptcy Attorneys is having a big three day seminar. I’ll be gone between May 15th and May 20th. I’ll be back in the office on the morning of Wednesday May 21st.

I wish I could say I was going to be on American Idol, but that’s not it. There are things I can learn at this seminar that would be hard to find anywhere else. What it comes down to is that I can’t afford to not go. The law of bankruptcy has been in a hard to track state of flux since the new legislation became effective in late 2005. It seems that every few days a judicial decision turns up that changes the landscape. I need all the help I can get in keeping up with this stuff.

Of course, I am planning on seeing a few sights as well. I’m allowing one day in the trip just for that. Right now I would say that the beach could be a priority.

So email me or leave me a message. I will probably be checking my email. I no longer travel without my laptop. The wireless Internet for the hotel where I’ll be did get a poor review, but I expect I’ll figure it out. I’ll be returning my calls on Wednesday, May 21st.

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/

Youtube Video Bankruptcy Update Part IV

Rambling in front of the video camera the other day, it was not long before I got on the subject of how unethical, illegal, fraudulent and criminal it is to attempt charging attorney fees for a bankruptcy on a credit card – with the intent of getting rid of the credit card debt in that bankruptcy. If you run up a debt intending to list it in a bankruptcy, that is fraud. It can be grounds to have a particular debt not discharged in your case; or it could be grounds to have the entire bankruptcy thrown out. Worse yet, it’s fraud and could be prosecuted as a felony. Here’s what I said about it on Youtube:

Bankruptcy Update Part III – Spring 2008

Here’s another clip in the series that I have been working on. In this one I talk about how the Senate has eliminated a section of the pending mortgage relief legislation which would have allowed a bankruptcy judge to reduce the balance owing on a mortgage. The idea was that in those situations where the mortgage is more than the value of the property, the bankruptcy judge could reduce the balance of the mortgage to be equal to the value of the house. The rest of the balance of the mortgage would be discharged in the bankruptcy. Sounds like a wonderful idea to me. But the Senate committee didn’t think so. Too much lobbying by the banking industry.

So for the time being there is no provision in the bankruptcy law for an option to discharge the part of the mortgage that exceeds the value of the house, while allowing the balance of the mortgage to be a lien on the house. I feel as if I may be doing a bad job at explaining this. It’s the kind of thing that many non-lawyers might not understand. As a result, the Senate gets away with not passing a really beneficial piece of legislation, because nobody quite understands what it is they didn’t pass.

Youtube video Bankruptcy Update Part II

Here’s the second in the series of videos where I update my earlier comments about the current state of bankruptcy law and practice. In this video I talk about how Congress has withdrawn funding from the U. S Trustee’s office for the hiring of outside accounting firms to conduct audits of debtor’s records.

Update December 4, 2014:  I’ve removed the video referred to here from my Youtube channel because the info is so outdated.  The sad fact is that those audits of Chapter 7 cases are in full swing again, and any body who files a Chapter 7 bankruptcy has to think in terms of being ready to respond to an audit.  These audits are conducted by a New York accounting firm – you’d think they were tallying the votes for American Idol.  They’re very picky.

Youtube video Bankruptcy Update Part I

Yesterday, before that walk at the nature center, I spent a few hours in the office. I had brought a shirt, tie and jacket, as well as my Flip Video camera. I have been posting to a Youtube channel for almost a year, and I felt yesterday that I might be motivated to record a few new comments on video. Once I got started, I surprised myself about how much I had to say. I grabbed a few I items that were loose on my desk, and found that these made a more than full agenda of things to talk about.

I set up the Flip Video, punched record and walked around to sit in front of it. When I reviewed what I had when I was done, it was almost half an hour of stuff. This time it was all on the subject of bankruptcy. My idea was to supplement and update what I’ve already said on earlier videos. Now what I recorded is so long that I will have to edit it down into manageable pieces. By the time I’m done editing it will be a whole series of clips. The first of them is embedded here: