Bankruptcy: an overview

It is unavoidable to conclude, from the news, that people in the United States are in pain! Financial pain and hurt!

Tens of millions of people in this country suffer from the strains of debt: Mortgage Debt, Credit Card Debt, Auto Finance Debt, Tax Debt, Student Loan Debt!

For some of these people, filing bankruptcy may be the best option to dig out of a bad situation. A consultation with a competent attorney may be the first step in digging out.

What is bankruptcy?

Bankruptcy is a concept as old as the Bible. In biblical times, in the Jubilee Year, all debts owed to creditors would be forgiven. In our United States Constitution, the privilege of filing for bankruptcy is inscribed. While some people still perceive there being a great stigma in filing for bankruptcy protection, most people recognize that it is not only legally mandated, but is well-rooted in good ethical and moral behavior.

The term “Bankruptcy” refers to a proceeding in a special court called the “United States Bankruptcy Court” in which a person (the “debtor”) files a “petition” and obtains “relief” from the court. The petition is a document which lists four broad categories of information about the debtor:

  1. Assets
  2. Debts
  3. Income
  4. Expenses

The bankruptcy process, an overview:

After the petition is filed with the court, the debtor is interviewed by a court-appointed trustee, who inquires as to the circumstances that led up to bankruptcy and determines whether there are any assets to administer on behalf of creditors. The end result of a bankruptcy case is the “discharge” of debts.

In order to prepare for the decision as to whether bankruptcy is appropriate, the person should assemble various documents, such as tax returns, paystubs, account statements for all debts, appraisals of property, deeds or title to property, and bank statements.

Through the bankruptcy process, the debtor may be permitted to retain property which is “exempt” from creditors. There are various exemptions under law which permit a debtor to keep property, such as household furnishings, homestead exemption in real estate, pensions, and other items. The skilled practitioner will assist in finding exemptions for most or all of the debtor’s property. If property is not exempt, then the trustee can sell it and pay over the sale proceeds to creditors.

For many people, the decision to file bankruptcy is motivated by one or both of the following two factors:

  1. Discharge of debt: Most debts will be discharged. This means that the debtor will no longer be obligated to repay the debts. Some debts are not dischargeable because they are exceptions to the rule, such as domestic support obligations, tax debt, or government fines. However, even some of these seemingly nondischargeable debts may still be discharged. Other debts may be “secured” on property for collateral for the loan, such as a home mortgage or auto finance loan. These debts might not be discharged because the creditor may seek to take back the property.
  2. Automatic stay: The other major reason people file for bankruptcy is to get the benefit of the “Stop” sign – the automatic stay. Sometimes, creditors are calling the debtor day and night to get payments on accounts; sometimes, there is a garnishment on the debtor’s wages; and sometimes, bank accounts are being seized. Once the bankruptcy is filed, creditors are “stayed” or stopped from pursuing the debtor further. For many debtors, this is quite a relief!

There are two general types of bankruptcy cases:

The first type is a Chapter 7 bankruptcy, also known as a “liquidation proceeding” or “straight bankruptcy.” In this case, the debtor turns over to the trustee all non-exempt assets, in order for the assets to be liquidated or sold by the trustee to pay creditors. It is no secret that 95% of personal bankruptcies are “No Asset” cases, in which the debtor has no non-exempt assets to turn over to the trustee.

The second type is a “Reorganization” proceeding, which can be filed under Chapter 9 (municipalities); Chapter 11 (corporate entities and larger-debt cases); Chapter 12 (family farmers); and Chapter 13 (individual wage-earner cases). In a reorganization case, the debtor has non-exempt assets he wants to keep, such as a home, and proposes a plan to repay creditors a certain amount of money over a certain term.

If you have questions concerning bankruptcy, please feel free to contact the law offices of Richard A. Klass, Esq. by phone or e-mail for more information.

copyr. 2014 Richard A. Klass, Esq.
The firm’s website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation in Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.com with any questions.
Prior results do not guarantee a similar outcome.

R. A. Klass
Your Court Street Lawyer

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Exempt Assets: ” Wild Card ” (Or How Mad Max Got to Keep His Camaro!)

It was a really nice car – a 1999 Chevy Camaro with only 51,000 miles. Maybe it wasn’t the most expensive car (like a Chevy Corvette) but Mad Max loved driving it on weekends. Mr. Max also had another vehicle (a truck) that he needed for work during the week. Unfortunately, Max’s business wasn’t doing well and he was forced to file for personal bankruptcy due to his mounting debts. As part of filing for Chapter 7 bankruptcy, Max had to submit to the Bankruptcy Court his Petition.

Chapter 7 Bankruptcy Petition

When a person files for bankruptcy (the “ debtor ”), he has to file a Petition, in which the debtor lists comprehensive financial information, including his (a) assets; (b) liabilities; (c) income; and (d) expenses. In the Petition, the debtor will detail all of his assets, such as real estate, bank accounts, life insurance policies, pensions and all other personal assets. Among the typical assets that are listed in the Petition is a debtor’s car.

Exempt Assets

There is a concept in the law that, even though a person is a debtor and owes debts to creditors, there are certain types of property and income that will be left with the debtor (“ exempt ”) — and, thus, beyond the reach of creditors. These types of “ exempt ” property and income are enumerated under various sections of law. In New York, for instance, those sections of law include various provisions under the Debtor and Creditor Law, Civil Practice Law and Rules (CPLR), Insurance Law and other sections. The usual types of exempt property owned by people filing bankruptcy include clothing, household furnishings, security deposits with a landlord, life insurance and annuity policies, and retirement/pension plans (such as 401(k) plans; Individual Retirement Accounts (IRAs); Roth IRAs; 403(b) plans; and similar qualified plans). The usual types of exempt income of a debtor include social security benefits, disability, unemployment, worker’s compensation, and 90% of wages earned 60 days prior to filing. In fact, over 90% of the bankruptcy cases filed throughout the country are commonly referred to as “ no asset ” cases in which, after taking the debtor’s exempt property off the table, there are no assets to distribute to creditors.*

Specifically as to a debtor’s car, under New York’s Debtor and Creditor Law Section 282(1), a debtor may take 1 exemption as follows: “Bankruptcy exemption of a motor vehicle. One motor vehicle not exceeding four thousand dollars in value above liens and encumbrances of the debtor; provided, however, if such vehicle has been equipped for use by a disabled debtor, then ten thousand dollars in value above liens and encumbrances of the debtor.”

Two Cars; Only One Exemption

In Max’s situation, he owned 2 cars (Truck worth $3,600 and Camaro worth $8,800). Under New York State law, Max had only 1 exemption for a car, and he needed to keep his truck for work purposes. But, Max really wanted to keep his Camaro. He could only keep the truck, using the $4,000 car exemption; the Camaro would have to be turned over to the bankruptcy trustee and sold to pay off creditors’ claims.

Fortunately for the debtor, he came to Richard A. Klass, Your Court Street Lawyer, for help. The first step was trying to figure out how Max could retain both cars even though he was going to file for bankruptcy.

The Federal “ Wild Card ” Exemption

A few years ago, the law was changed to allow New York debtors to opt to take either the New York or federal exemptions. Up until then, debtors who filed for bankruptcy in New York State could only use the New York State exemptions (as opposed to the exemptions afforded to debtors under the federal Bankruptcy Code). Some of the New York exemptions are actually quite generous in some respects, including the “ homestead ” exemption for real estate up to $150,000.

Under the federal exemptions, there is, however, a really good exemption for debtors in the same situation as Max — the “ Wild Card ” one! Under Bankruptcy Code Section 522(d)(5), a debtor is allowed to take an exemption on any property up to $12,725 (“The debtor’s aggregate interest in any property, not to exceed in value $1,225 plus up to $11,500 of any unused amount of the exemption provided under paragraph (1) of this subsection [the homestead exemption].”)**

In preparing the Petition, the federal exemptions were selected for Max. The truck was exempted as the one car permitted ($3,675 exemption) to be taken under federal law. The Chevy Camaro was exempted for its full amount ($8,800) because Max was allowed to use the ” Wild Card ” exemption. Mad Max got to keep both cars!

by Richard A. Klass, Esq.

* Source: National Association of Bankruptcy Trustees (www.nabt.com/faq.cfm)

** (1) The debtor’s aggregate interest, not to exceed $22,975 in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence, or in a burial plot for the debtor or a dependent of the debtor.

Art Credits:
Image on page one: Joker red 02.svg; Author: David Bellot, Berkeley, CA, USA. Used under the terms of the GNU Lesser General Public License as published by the Free Software Foundation.

copyr. 2014 Richard A. Klass, Esq.
The firm’s website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation in Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.com with any questions.
Prior results do not guarantee a similar outcome.

R. A. Klass
Your Court Street Lawyer

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The Producer: overselling available interests

The Rehearsal Onstage (detail), c. 1874, by Edgar Degas (1834–1917) illustrating article by Richard Klass about overselling available interests.
The Rehearsal Onstage (detail), c. 1874, by Edgar Degas (1834–1917).

Mel Brooks’ movie and musical The Producers may have been a fictional story of fraudsters selling more shares in the production of their Broadway show “Springtime for Hitler” than actually existed, but such fraudsters exist in real life, overselling available interests not only in Broadway productions, but in every type of investment, including real estate.

In this modern day The Producers story, a particular real estate broker (we’ll give him the name “Bob”) had a plan. The idea behind this particular investment was simple: purchase a house in Passaic, New Jersey; fix it up; and then resell it for a profit—the classic real estate “ flip. ” This broker solicited a number of investors. Each investor would purchase a membership interest in a limited liability company [LLC]. With the funds provided by the members, the LLC would buy the house. A contractor-partner would be hired to renovate the house. Each investor was promised a certain percentage of the net proceeds from the ultimate sale of the house. Unfortunately, the real estate market tanked, construction costs soared and the investment became a huge loss before construction was ever completed.

New Jersey state court action

One of the investors (we’ll call him “John”) brought a lawsuit in the Superior Court in New Jersey for breach of contract, misappropriation of funds, and fraud. In that case, the judge appointed a special fiscal agent (similar to a court-appointed receiver) to manage the operations of the house, list the house for sale, and take all steps necessary to sell the house and distribute the net proceeds to the LLC’s investors.

Real estate broker files for bankruptcy

Bob filed for personal bankruptcy in the New Jersey Bankruptcy Court to avoid his liability to the investors. John filed a lawsuit (known as an adversary proceeding) against Bob in the New Jersey bankruptcy case to have Bob’s liability in this house-investment-gone-wrong declared “nondischargeable.” (The adversary proceeding here was a mini-lawsuit inside of the bankruptcy case, intended to have the effect that Bob would remain liable to John for the collapse of the real estate deal.) In the adversary proceeding, John alleged that Bob brought too many investors into the deal without telling the other investors. A settlement was reached between John and Bob in the “adversary proceeding” and John negotiated with the bankruptcy trustee to purchase the house directly from the trustee to recoup some of his (John’s) losses.

Another investor (we’ll call her “Sally”) who lost money in the same Passaic real estate deal then sued John (now the owner of the Passaic real estate) in New York City’s Civil Court, claiming that John defrauded Sally by not including her in the buy-out of the house. This is when John sought help from Richard A. Klass, Your Court Street Lawyer. The aim was to have Sally’s lawsuit, brought in New York, dismissed.

Lack of jurisdiction in the New York Civil Court

There is a basic concept involving any court system that a particular court maintains the authority (“jurisdiction”) to make decisions and orders over a particular controversy.

According to New York’s Civil Practice Law and Rules [CPLR] Section 302, New York State courts may exercise jurisdiction over nonresidents under certain circumstances, when the defendant:

  1. Transacts any business within the state or contracts anywhere to supply goods or services in the state; or
  2. Commits a tortious act within the state, except as to a cause of action for defamation of character arising from the act; or
  3. Commits a tortious act without the state causing injury to person or property within the state.

There is a separate rule as to when New York City’s Civil Court may exercise jurisdiction over cases because it is considered a court of “limited” jurisdiction (See Civil Court Act Section 202).

In asking the judge to dismiss the New York Civil Court case, Richard A. Klass argued that any action that could be brought by Sally must be brought in the State of New Jersey, and not in New York. The project-house was located in New Jersey; the LLC was a New Jersey entity; both the New Jersey Superior Court and New Jersey Bankruptcy Court had pending cases involving the house and the LLC; and all of the events transpired in New Jersey. It was urged that New York was the wrong forum for Sally to bring this dispute, citing to Epstein v. Sirivejkul, 48 NY2d 728 [1979]; Irrigation and Industrial Development Corp. v. Indag S.A., 37 NY2d 522 [1975].

The Civil Court judge agreed with the arguments of Richard A. Klass and determined that the New York Civil Court lacked jurisdiction over the case. The judge specifically found that the transaction in dispute occurred in New Jersey and the plaintiff presented no allegations that there was tortious conduct within New York State; also, the fact that there were existing proceedings in New Jersey courts confirmed the conclusion that New Jersey was the proper forum for any dispute. The court then dismissed the plaintiff’s case.

by Richard A. Klass, Esq.


copyr. 2013 Richard A. Klass, Esq.
The firm’s website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation at 16 Court Street, 28th Floor, Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.com with any questions.
Prior results do not guarantee a similar outcome.

R. A. Klass
Your Court Street Lawyer

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529 Plans in Bankruptcy

Americans rely on easy credit in order to fund their lifestyles. We are lured by good credit terms, the desire to buy a home, and the need to pay for things like education and home improvements. We do our best to save for our future, putting money into Individual Retirement Accounts (IRAs) or 401Ks, money that is not to be used until retirement. When we have children we consider their futures and the ever increasing costs of college, and we want to save for our children’s future education by opening Education IRAs or 529 Savings Plans.

In New York State, when someone obtains a money judgment against you, they have several remedies in order to obtain payment of the judgment, including garnishing your wages, putting a lien on bank accounts and other property held in your name. This may include a 529 Savings Plan. CPLR section 5205 provides several exemptions to protect debtors. It lists several types of property that cannot be reached by creditors. CPLR 5205(j) provides protection for New York 529 Savings Plans by exempting and thus protecting from creditors a New York State 529 Savings Plan in an amount not exceeding $10,000. This is good news and bad news for debtors. It protects smaller 529 plans from being plundered by a creditor, but if you’ve saved for many years, the 529 Savings Plan may exceed the $10,000 balance and is thus open season for a creditor looking for repayment of an outstanding debt.

Bankruptcy can offer better protection for a debtor who is trying to protect a 529 Savings Plan he has created for his children. Bankruptcy Code 541(b)(6) provides that funds placed in an 529 Savings Plan 1 year or longer before the date the debtor files for bankruptcy is not property of the bankruptcy estate if the designated beneficiary is a child, stepchild, grandchild or step-grandchild, and the funds contributed do not exceed the total contributions permitted. In addition, in order to ensure debtors have not transferred assets to exempt accounts in preparation of filing bankruptcy, any contributions made between year one and year two before filing are limited to a total contribution of $5,850. The exemption regarding an education IRA is similar in nature to the 529 Savings Plan, but include a requirement that the account could not be pledged to have credit extended to the debtor. This language can be found in Bankruptcy Code 541(b)(5).

Therefore, for individuals who are contemplating bankruptcy but are concerned about 529 Savings Plans they have established for their children can now rest easy in the knowledge these accounts may be protected and may not be reached by creditors.

by Elisa S. Rosenthal, Esq.,
Associate
Law Office of Richard A. Klass

R. A. Klass
Your Court Street Lawyer

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Home! Sweet Home!

The homeowner had a bunch of problems. Not only was he saddled with over $30,000 in credit card debt spread across several credit card accounts, he had also just received the Summons and Complaint, filed by his mortgage lender, seeking to foreclose on the mortgage recorded against his home. He was delinquent on his mortgage and owed many months’ worth of mortgage arrears. This homeowner is one of the tens of thousands of homeowners across the State (and more across the country) who have fallen into foreclosure with little help or support. Fortunately for the homeowner, he came to Richard A. Klass, Your Court Street Lawyer, for help.

Establishing the Best Strategy

In order to establish the best strategy for the particular situation, the house’s fair market value first had to be considered.

Many homeowners have seen their property values drop so low that their houses are “underwater,” meaning they owe more on their mortgage than the house is worth. In such circumstances, there are different strategies which may be taken by homeowners, including offering the lender a deed in lieu of foreclosure or staying in possession of the house for as long as possible until the foreclosure auction sale. In this case, the homeowner was unsure of his house’s fair market value, so he was advised to hire a licensed appraiser for an honest, unbiased opinion as to the value of the house. The appraisal came back and showed that the amount due to the mortgage lender on the outstanding mortgage was nearly equal to the fair market value. The homeowner and his wife liked their home and neighborhood, so he wanted to figure out a way to save the house, if possible.

Defending the Mortgage Foreclosure Case

The foreclosure proceeding brought by the mortgage lender had to be answered. The homeowner answered the Complaint and also brought Counterclaims against the lender, alleging that the lender engaged in predatory lending practices, fraud, and violations of the Truth in Lending Act (TILA) and the Home Ownership and Equity Protection Act (HOEPA). Filing the Answer and Counterclaims placed an obstacle in the path of the mortgage lender and helped slow down the foreclosure process.

As another part of slowing down the mortgage lender’s case, discovery demands were served, including a request for copies of all documents signed at the closing, when the mortgage was first obtained. It is crucial to a homeowner’s defense of a mortgage foreclosure case, in a time when affidavits are “robo-signed” by non-bank representatives, original documentation is lost by mortgage departments, and mortgages lack assignment from the original lender, that all documents be reviewed for their authenticity and truthfulness.

A Dollar Can Be Stretched Only So Far!

After establishing that the house was not very much “underwater” and that the homeowner wanted to keep the house, the next step was to consider how to pay the mortgage, property taxes and other carrying charges of the house. The homeowner’s take-home salary could only go so far — he could not afford to make the regular monthly mortgage payment as well as the minimum payments on all the various credit card accounts. However, if he could shed the credit card debt, he could more easily afford all of his other expenses.

“Straight” Bankruptcy

Generally, homeowners have to file a “Chapter 13” bankruptcy case to save their home. In a Chapter 13 case, a monthly payment plan over a three- to five-year term is proposed by the debtor, reviewed by the trustee, and then approved or denied by the Bankruptcy Judge. However, in the present situation, a Chapter 13 bankruptcy case was not necessary because there was no equity in the house to protect (net equity being the fair market value of the house less the balance due on the mortgage). Accordingly, the decision was made to file a “Chapter 7” bankruptcy case. A Chapter 7 bankruptcy case — also known as a “straight bankruptcy” — is a legal proceeding in which all of the debtor’s ‘unsecured debts’ (such as credit cards, personal loans and lines of credit) are discharged or extinguished. Once the bankruptcy case was filed, the homeowner benefited from the automatic stay provisions of the Bankruptcy Code. Basically, these provisions act as a “Stop Sign” against creditors, prohibiting them from taking any collection actions against debtors. When this homeowner/debtor received his Discharge, by which he discharged or extinguished all of the unsecured credit card debt, he was left with only the mortgage debt (also known as ‘secured debt’ because the house is collateral for the loan).

Mortgage Foreclosure Proceeding — Round Two!

In New York State, when a homeowner/defendant puts in an appearance in a mortgage foreclosure case, the court puts the case onto its Foreclosure Settlement Conference calendar and schedules a conference between the mortgage lender and the homeowner. The purpose of the conference is to see whether there is any way to mediate and settle the dispute, including exploring the loan modification process.

In our present situation, with the bankruptcy case over and the homeowner coming straight out of his Chapter 7 case with his Discharge of all other debts (his “fresh start!”), the mortgage foreclosure proceeding was placed back onto the Supreme Court’s Foreclosure Settlement Conference calendar. Pursuant to the conference, the homeowner applied for loan modification with the mortgage lender and provided all documentation required, including the application, and his tax returns and paystubs.

With no outstanding credit card debt, the homeowner’s salary clearly demonstrated that he had more than sufficient income to support the mortgage and carrying charges of the house. The good news came at the next foreclosure settlement conference: the homeowner’s application to modify his mortgage loan was approved by the lender and the foreclosure proceeding was dismissed. Home! Sweet Home!

by Richard A. Klass, Esq.
©2012 Richard A. Klass.

copyr. 2012 Richard A. Klass, Esq.
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation at 16 Court Street, 28th Floor, Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.com with any questions.
Prior results do not guarantee a similar outcome.

Credits:
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Image at top: Flowering Plum Tree, Eragny, 1894, by Camille Pissarro (1830-1903). This image is in the public domain because its copyright has expired. This applies to Australia, the European Union and those countries with a copyright term of life of the author plus 70 years. This image is in the public domain in the United States. This applies to U.S. works where the copyright has expired, often because its first publication occurred prior to January 1, 1923.

R. A. Klass
Your Court Street Lawyer

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