Chapter 20 Bankruptcy Practice Before Judge Robin Riblet

I was present in Court on January 11, 2013 when Judge Robin Riblet, Central District of California, Northern Division, explained her views of so-called "Chapter 20" bankruptcy lien stripping and reviewed various authorities.  I have written a short blog post on our main website describing those views and reviewing the cases cited.

This issue must be decided by the Ninth Circuit.  We now have a distinct and wide chasm between the San Fernando Valley Division and the Northern Division.  We have a dramatic split between various courts around the country.  The Eighth Circuit in In re Fisette, (8th Cir. BAP 2011) 455 B.R. 177 did not actually address the merits of this issue.
 

CM/ECF Update: Notice of Available Chapter and Statement of Social Security Number


From the United States Bankruptcy Court, Central District of California News.

CM/ECF

The following bankruptcy  The  following  bankruptcy  forms were recently revised:  

Notice of Available Chapters  Notice of Available Chapters  (11/12) and Statement of  Social Security Number  and Statement of Financial  and  Statement  of  Financial  Affairs (12/12).

However,   many people continue  to file the old forms and  receive deficiency notices as a result.  Be sure to submit up-to-date forms in order to avoid unnecessary deficiency notices and the potential dismissal of your case.
 

Key Noticing Addresses for Bankruptcy

By Andrew Mansfield

You must provide notice to certain governmental agencies and taxing authorities at precise addresses.  I have placed several of those addresses here for easy reference.

Internal Revenue Service
P.O. Box 7346
Philadelphia, PA 19101-7346

Securities Exchange Commission
5670 Wilshire Boulevard, 11th Floor
Los Angeles, CA  90036

Employment Development Department
Bankruptcy Group MIC 92E
P. O. Box 826880
Sacramento, CA  94280-0001

Service of Adversary Proceedings:
Franchise Tax Board
Chief Counsel
c/o General Counsel Section
P.O. Box 1720, MS:  A-260
Rancho Cordova, CA 95741-1720

Franchise Tax Board
Bankruptcy Section, MS: A-340
P. O. Box 2952
Sacramento, CA  95812-2952

Los Angeles County Tax Collector
P. O. Box 54110
Los Angeles, CA 90051-0110


If you need assistance with filing for bankruptcy, call Mansfield Law Office.  We are conveniently located in Ventura and Oxnard.  

United States Bankruptcy Court, Central District of California Call Center


Did you know that the United States Bankruptcy Court for the Central District of California has a call center?

The court has established a Call Center that can be reached at the toll free telephone number (855) 460-9641.  The Call Center handles calls from the public for the Court’s Los Angeles, Riverside, Santa Ana, Northern, and San Fernando divisions.  The Call Center provides automated access to commonly requested information such as how to obtain free or low cost legal assistance, Court locations, attorney information, credit reporting and fraud, fee and check acceptance policy.  The automated service is available 24 hours a day, 7 days a week.

Call Center operators are available from 9:00 am to 4:00 pm, Monday through Friday, excluding federal holidays and other published Court closures.

Should Private Student Loans be Non-Dischargeable?

Should student loans issued by private for-profit lenders be eligible to be discharged under the Bankruptcy Code?  Rep. Steve Cohen (D-Tenn.) just introduced H.R. 2028, the "Private Student Loan Bankruptcy Fairness Act," which would allow private education loan debts to once again be erased in bankruptcy just like other types of debts.

The full text of the bill is here.

Reverse Mortgages

The American Bankruptcy Institute points to information on seniors and reverse mortgages.  Here is a summary and a link.

Reverse mortgages, which allow homeowners 62 and older to borrow money against the value of their homes and not pay it back until they move out or die, are showing renewed problems of fraud by lenders, the New York Times reported today. Federal and state regulators are documenting new instances of abuse as smaller mortgage brokers, including former subprime lenders, flood the market after the recent exit of big banks and as defaults on the loans hit record rates. Some lenders are aggressively pitching loans to seniors who cannot afford the fees associated with them, not to mention the property taxes and maintenance. Others are wooing seniors with promises that the loans are free money that can be used to finance long-coveted cruises, without clearly explaining the risks. As the baby boomer generation heads for retirement and more seniors grapple with dwindling savings, the Consumer Financial Protection Bureau is working on new rules that could mean better disclosure for consumers and stricter supervision of lenders. More than 775,000 of such loans are outstanding, according to the federal government.

For more information see the full New York Times article here.
 

Questioning Student Debt


The Washington Post reports that nearly 30% of college students who took out educational loans dropped out of college.  Those who leave school early are then four times more likely to fall behind on their educational debt obligation.  This is occurring against the backdrop of student debt now exceeding $1 trillion.  

Because student loans are (practically) non-dischargeable in bankruptcy, these facts further highlight the debt and bankruptcy complications we are likely to soon encounter from such a high level of non-dischargeable debt.

Non-Support Divorce Debt and Bankruptcy


Under the Bankruptcy Code, divorce-related debts are given one of two classifications.  One classification is "domestic support," which includes child and spousal support.  Other divorce-related debts, such as hold harmless obligations or equalizing payments, are non-support debts.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (hereinafter “BAPCPA”) enacted on April 20, 2005, and generally applicable to all cases filed on or after October 17, 2005, made various revisions to Title 11 of the United States Code (hereinafter “Bankruptcy Code”) with regard to divorce-related debts.  For example, debts such as child and spousal  support were given the new classification of “domestic support obligation” and were given added protection.

A debtor who receives a Chapter 13 discharge will receive a discharge of non-support debts.  Under limited circumstances, the non-filing spouse can object to discharge but must file an adversary proceeding in the bankruptcy court within sixty days of the first meeting of creditors to do so.

Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA), non-support debts are now treated much differently in Chapter 7.  A debtor who receives a Chapter 7 discharge  cannot discharge any debts incurred in connection with a divorce or separation.

 

Bankruptcy and Being the Beneficiary of a Trust: A Hard Choice?

Are you the beneficiary of a revocable trust?  Many families use revocable trusts for estate planning purposes.  Like so many Americans, let us assume that you are in debt and contemplating the need to file for protection under the bankruptcy code.  What happens if you are the beneficiary of such a trust and your parent or loved one dies suddenly? Must the assets in the trust flow to you and then out to your creditors?

In California, the answer is, "no."  The United States Court of Appeals for the Ninth Circuit decided Gaughan v. Costas in February, 2009.  In that case, the court found that a "pre-petition disclaimer" of the trust assets was valid.

In California, a disclaimer is a procedure whereby a beneficiary can elect to forego an asset. The disclaimer must be in writing.  It must be filed within a reasonable time after the person who is to take assets under a trust learns of the right to take the assets.  Typically, a reasonable time is nine months or less.  Finally, the disclaimer must be filed in the Superior Court in the county in which the estate of the decedent is administered.

One might think that using the California statute allowing one to disclaim trust assets (and thereby causing those assets to flow to family) would be classified as a fraudulent transfer and therefore violate 11 U.S.C. section 548.  To constitute a fraudulent transfer a disclaimer would actually have to transfer "property."  In determining the definition of property, however, the Federal courts look to state law.  A disclaimer is defined as a refusal to accept an interest in property.  One cannot transfer property that one never accepted.

The United States Court of Appeals for the Fifth Circuit recently opted to follow Gaughan v. Costas.  In that decision, Laughlin v. Nouveau Body & Tan, LLC (In re Laughlin), 602 F.3d 417 (5th. Cir., 2010), the court found:

The Ninth Circuit's reasoning is sound: the bankruptcy code defines "transfer," but to effect a transfer there must be "property" or an "interest in property." And the Supreme Court has repeatedly held that "property interests are created and defined by state law" in the absence of a controlling federal interest.

As it currently stands, the law allows a debtor to disclaim assets coming to him or her under a trust, thereby allowing those assets to go to other family members, and then file for bankruptcy protection.

"Income" from Foreclosure, Modification, Short Sale, or Bankruptcy

"Income" from the Cancellation of Debt

Generally, if you owe a debt to someone and they cancel or forgive the debt, you are treated for income tax purposes as having income and may have to pay tax on this income.  At the moment, there are major exceptions for debt forgiveness and reduction on principal residences.  However, these exceptions are due to expire at the end of 2012.  

Bankruptcy always offers an alternative way to ensure that debt forgiveness does not result in income being reported by the lender.  It adds insult to injury to be taxed on the "forgiveness" of debt resulting from financial hardship.

 


Tax Consequences of a Short Sale, Foreclosure, or Modification

In April 2010, California passed a law that provides homeowners with an exclusion from income tax obligations when a short sale results in debt forgiveness. The law provides an exclusion from tax for individuals who have received up to $800,000 of forgiven debt. The full $800,000, though, is not excluded. Instead, the state excludes the first $500,000 of all forgiven debt up to $800,000. Individuals who have received debt forgiveness that is greater than $800,000 will not have any relief from tax consequences. They must report all of the forgiven debt as income. The law applies to state income tax for 2009 through 2012.

The Federal government has an even more generous exclusion.  The Mortgage Debt Relief Act of 2007 typically lets taxpayers exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. p to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately).

For both California and the Federal government, these laws "sunset" or end at the end of 2012.  It is currently unclear whether either program will be extended.

Also note that both of these exclusions (California and Federal) apply only to debt from a principal residence.

 

 

Tax Consequences of Debt Discharged in Bankruptcy

Debt cancelled in a Chapter7 or Chapter 13 bankruptcy is excluded from income.  You must still file a form to report your cancelled debt.  See a tax professional to ensure that you file your taxes properly to benefit from the protection afforded by bankruptcy.  

 

 

 

Insolvency

You also do not include a cancelled debt in income to the extent that you were "insolvent" immediately before the cancellation of the debt.  Insolvency is defined as a circumstance in which your liabilities excelled the fair market value of assets.

For more information, see the IRS website. This does not constitute tax or legal advice.  Please retain qualified bankruptcy counsel and seek the assistance of a tax professional to further explore these topics.