When the debtors filed for Chapter 7 bankruptcy, they had two outstanding mortgages on their residence. The first was partially secured, and the second was fully underwater. The debtors filed an adversary complaint seeking to strip down the partially secured senior lien. The bankruptcy court, compelled by Dewsnup v.Timm, 502 U.S. 410 (1992) and Bank of America, N.A. v. Caulkett, 575 U.S. 790 (2015), granted the creditor’s motion to dismiss. In re Vasquez, No. 19-1841, Adv. Proc. No. 19-100 (Bankr. E.D. N.C. March 25, 2020). Agreeing with the bankruptcy court’s “thorough analysis and conclusions,” the district court affirmed. In re Vasquez, No. 20-62 (E.D. N.C. Aug. 2020). [Read more…] about Challenge to Dewsnup Moving Up
Funds Fraudulently Transferred Pre-Conversion Are Recoverable by the Chapter 7 Trustee
Funds fraudulently transferred during a Chapter 13 case remain in the debtor’s “constructive possession” and become part of the Chapter 7 estate upon conversion. Brown v. Barclay, No. 18-60029 (9th Cir. March 23, 2020).
The Chapter 13 debtor received an inheritance while in bankruptcy, which he divided between himself and his three brothers without notifying the Chapter 13 trustee. When the trustee learned of the unauthorized transfer, he moved the court to convert the debtor’s case to Chapter 7 as a sanction. Finding the debtor had acted in bad faith, the bankruptcy court ordered the conversion. The Chapter 7 trustee sought turnover of the funds from all the brothers. One of the brothers, the appellant in this case, fought turnover on the basis that because the debtor was not in control of the funds at the time of conversion, they did not become part of the chapter 7 estate. The bankruptcy court disagreed, and the bankruptcy appellate panel affirmed. [Read more…] about Funds Fraudulently Transferred Pre-Conversion Are Recoverable by the Chapter 7 Trustee
First-In First-Out Applies to Commingled Account
The Bankruptcy Court correctly used the first-in, first-out approach to determine how much of a commingled account could be attributed to exempt funds. Tydings v. Reed (In re Tydings), No. 20-4057 (W.D. Mo. Sept. 3, 2020).
After her husband died, the Chapter 7 debtor received surviving widow’s social security benefits, which she deposited into her bank account, where she also deposited her weekly paychecks. Before receiving the social security payments, the debtor had $581.27 in her bank account. In the three months prior to her bankruptcy filing, the debtor deposited $15,171.57 in social security funds and $6,670.38 in wages into the account. During that same period, the debtor withdrew $13,461.07 from the account, leaving a balance of $8,939.15 on the petition date. The debtor claimed the entire balance in her account as exempt in bankruptcy. The trustee objected because not all the funds in the account were exempt. The trustee argued that the court should apply a first-in, first-out (FIFO) analysis, which would allow the debtor to exempt $3,981. The bankruptcy court sustained the objection, and the debtor appealed to the district court. [Read more…] about First-In First-Out Applies to Commingled Account
Texas District’s Treatment of Tax Refund In Chapter 13 Invalidated
Finding that it encroached on a below-median debtor’s substantive rights, the Fifth Circuit invalidated a local form Chapter 13 plan provision that required all debtors to turn over any tax refund in excess of $2,000. Diaz v. Viegelahn, No. 19-50982 (5th Cir. Aug. 26, 2020).
NCBRC filed an amicus brief on behalf of the NACBA membership in support of the debtor in this case. [Read more…] about Texas District’s Treatment of Tax Refund In Chapter 13 Invalidated
10th Circuit – Student Loan Not Excepted from Discharge as Educational Benefit
An educational benefit is not a student loan for nondischargeability purposes under section 523(a)(8)(A)(ii). McDaniel v. Navient Solutions, LLC, No. 18-1445 (10th Cir. Aug. 31, 2020).
When the debtors filed their Chapter 13 petition, they had many outstanding student loans, including six private educational loans held by Navient totaling approximately $107,000 (the Loan). The trustee objected to confirmation of the plan, citing its failure to provide for nondischargeable student loans. The debtors filed an amended plan specifically to correct certain inaccuracies not related to student loans. They also added the provision that “[s]tudent loans are to be treated as an unsecured Class Four claim or as follows: deferred until the end of the plan.” The plan defined unsecured Class Four claims as “[a]llowed unsecured claims not otherwise referred to in the Plan.” Navient agreed that class four claims were dischargeable. [Read more…] about 10th Circuit – Student Loan Not Excepted from Discharge as Educational Benefit
Social Security Benefits May Be Considered for Abuse under 707 and Good Faith under 1325
A debtor’s social security income is a proper factor to consider in an abuse analysis under section 707(b)(3)(B) and in a good faith analysis under section 1325(a)(3). Meehean v. Vara (In re Meehean), No. 20-10380 (E.D. Mich. Aug. 18, 2020).
When they filed their Chapter 7 petition, debtors listed $5,842 in monthly income ($4,007 in Social Security benefits and $1,835 in pension income) and $4,446 in monthly expenses. They had $142,871 in secured mortgage debt and $43,100 in unsecured non-priority debt. The trustee moved to dismiss the petition as an abuse of bankruptcy, arguing that, if the debtors committed their social security income to a chapter 13 plan, they could pay off their unsecured debt over five years. The bankruptcy court agreed and granted the trustee’s motion. In re Meehean, 611 B.R. 574 (Bankr. E.D. Mich. 2020).
The debtors appealed to the district court, arguing that the bankruptcy court erred by considering social security income as a factor in a totality of circumstances test for abuse of bankruptcy under section 707(b)(3)(B). [Read more…] about Social Security Benefits May Be Considered for Abuse under 707 and Good Faith under 1325
State Exemption Need Not Specify that it Applies in Bankruptcy
Reversing the courts below, the Seventh Circuit found that unpaid vacation wages that were exempt under state law were also exempt under bankruptcy law notwithstanding the lack of explicit reference to bankruptcy in the state statute. In re Burciaga, No. 19-2246 (7th Cir. Dec. 13, 2019).
The debtor filed for bankruptcy shortly after losing his job and at a time when his employer owed him $24,000 in unused vacation pay. The debtor sought to exempt 85% of the unpaid vacation time under an Illinois law that allows creditors to reach only 15% of unpaid wages. It was undisputed that Illinois law treats vacation time as wages. The trustee objected to the exemption arguing that there was no suggestion that the state legislature intended the exemption to apply in the federal bankruptcy context. The bankruptcy court sustained the objection, and the district court, agreeing with the trustee’s position, affirmed. [Read more…] about State Exemption Need Not Specify that it Applies in Bankruptcy
No Abuse of Discretion in Denying Motion to Compel Arbitration
The bankruptcy court did not abuse its discretion in denying the creditor’s motion to compel arbitration of two counts of the debtor’s adversary complaint where one count sought to disallow the creditor’s claim as based on a contract that violated Virginia’s usury and consumer finance laws and the other count asserted claims for violation of those same laws. Allied Title Lending, LLC v. Taylor, 2019 WL 5406039 (E.D. Va. Oct. 22, 2019) (case no. 3:18-cv-845), appeal filed, Taylor v. Allied Title Lending LLC, Case No. 19-2283 (4th Cir. filed Nov. 15, 2019).
The Chapter 13 debtor entered into a credit agreement with Allied Title Lending under which she agreed to pay back a $1,500 loan at an annualized interest rate of 273.75%. Allied filed a proof of claim for $2,756.92 in her bankruptcy, and the debtor filed an adversary complaint alleging, in pertinent part, that the underlying lending agreement was null and void because it violated Virginia’s usury and consumer finance laws. Ms. Taylor sought disallowance of Allied’s claim as well as monetary damages, fees, and costs for herself and a putative class of similarly situated plaintiffs. Allied moved to compel arbitration under the terms of the credit agreement. The Attorney General for the Commonwealth of Virginia then moved to intervene to press a claim against Allied for violation of Virginia consumer protection laws. At that time, the commonwealth had already filed a case against Allied in state court alleging that Allied’s open-end credit plan and interest rates violated state laws. [Read more…] about No Abuse of Discretion in Denying Motion to Compel Arbitration
Rhode Island Exempts Inherited IRAs
In answer to a question certified by the Bankruptcy Court for the District of Rhode Island, the Rhode Island Supreme Court determined that “under the plain and ordinary meaning of the language in § 9-26-4(11) and § 408, an inherited IRA is defined under § 408, and it is, therefore, exempt under § 9-26-4(11).” In re Kapsinow, No. 2018-94-M.P. (R.I. Dec. 11, 2019) (Bankr. D. R.I. 16-11859).
Chapter 7 debtor, Lynette Kapsinow, inherited an IRA from her mother which she sought to exempt from her bankruptcy estate under the Rhode Island exemption laws. It was undisputed that the account when held by the debtor’s mother was a qualified retirement account under 408 of the Internal Revenue Code. Once her mother died, Ms. Kapsinow had access to the funds without penalty, could not make contributions to the account, and was required to take minimum distributions. [Read more…] about Rhode Island Exempts Inherited IRAs
Haven Act Guide
The Honoring American Veterans in Extreme Need Act of 2019 (“HAVEN Act”) excludes certain benefits paid to veterans or their family members from the definition of current monthly income (“CMI”) found in the Bankruptcy Code. The HAVEN Act amends § 101(10A) of the Bankruptcy Code and supplements the 2005 amendments to the Code that excluded other government benefits, such as social security income.
This Guide provides an overview of the HAVEN Act, identifies benefits that are excluded, and answers frequently asked questions.