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“ Craig D. Robins, Esq., has been a practicing Long Island bankruptcy attorney for over twenty-four years ”
Chapter 7 Bankruptcy
Written by Craig D. Robins, Esq.Losing money in a Ponzi Scheme is bad enough. Being forced to file for bankruptcy relief because of these losses is even worse. But how about getting your bankruptcy discharge, and then being sued by the bankruptcy trustee overseeing the failed Ponzi business?
That’s exactly what happened to one of our clients last month.
Agape World, Inc. Lands in Bankruptcy Because of Ponzi Fraud
In February 2009, several creditors forced Agape World into an involuntary Chapter 7 bankruptcy in the Central Islip Bankruptcy Court, here on Long Island in the Eastern District of New York.
I previously wrote that Ken Silverman was Appointed Chapter 7 Trustee in Agape World Case . Around that time, it was discovered that Agape president Nicholas Cosmo perpetrated a Ponzi scheme involving several hundred million dollars.
Many Long Island consumers lost their life savings after falling victim to his scheme. As a result, many of them filed bankruptcy cases themselves.
We recently represented one of them and filed his Chapter 7 bankruptcy petition last year. The unfortunate debtor lost hundreds of thousands of dollars. Our client’s bankruptcy case itself was unremarkable and was routinely processed and closed as a no-asset case. The client got his discharge last month.
Out of the blue, Ken Silverman, the Agape World trustee, brought an adversary proceeding in the Agape World bankruptcy case against our client. He alleged that our client had received some distributions from Agape shortly before Agape was put into an involuntary bankruptcy, and that these payments now had to be returned to the Agape bankruptcy estate under several different legal theories.
We had not even scheduled Agape as a creditor in our client’s bankruptcy as we had no idea that there was any potential liability to them.
Trustee Recognizes Bankruptcy Discharge
In response to the adversary proceeding, we contacted an attorney in the trustee’s office and explained the circumstances of our client’s bankruptcy filing. It appeared that the trustee was totally unaware of our client’s prior bankruptcy as we had not included Agape or its trustee as a potential creditor.
We were concerned that the trustee would nevertheless seek to go forward with the adversary proceeding because the debtor had not listed Agape in the schedule of creditors.
However, we advised the trustee that failure to schedule a creditor in a no-asset Chapter 7 case does not, in and by itself, prevent the debtor from discharging that debt. I previously wrote about Inadvertently-Omitted Creditors in Chapter 7 Bankruptcy Cases.
Much to the trustee’s credit, he acknowledged that any possible liability of our client to Agape was discharged by virtue of the prior bankruptcy, and within 24 hours of advising his office of our client’s bankruptcy discharge, he withdrew the adversary proceeding.
Written by Craig D. Robins, Esq.Every so often we file a bankruptcy case that has a rather unusual asset – and unusual assets sometimes lead to unusual dispositions by the trustee.
Almost two years ago, in 2008, we filed a Chapter 7 bankruptcy petition in the Central Islip Bankruptcy Court here on Long Island that was routine in every respect – except one. The debtor had an unusual asset which the trustee thought he could sell for the benefit of creditors.
Our client, an African-American, had inherited some property 30 years ago that had been in his family for quite some time.
Forty Acres and a Mule
Apparently, the debtor’s great grandfather was a slave in Virginia and upon his emancipation around 1865, he was given some unimproved property in that state – what was then referred to as “forty acres and a mule.”
According to Wikipedia, 40 acres and a mule was a practice in the 1860’s of providing farmable land to Black former slaves who became free as Union armies occupied areas of the Confederacy.
The combination of the land, together with Army mules, was meant to provide a sound start for a family farm.
40 acres (16 hectares) was a standard lot size for rural land, being a sixteenth of a square mile.
Former Slave’s Property Handed Down to Debtor
Over the ensuing years, the great grandfather and his descendants carved up the property several times and transferred it down family lines.
When the debtor inherited some of this property about 30 years ago from his parents, it consisted of two unimproved lots, one about two acres in size, and the other about four acres. Other family members owned adjoining parcels. The trustee assumed that six acres of property had to be worth something.
However, the property was located in a very rural area in Southern Virginia consisting primarily of farms and vacant, unused land. Neither of the debtor’s parcels abutted a roadway; there were no structures on or near the land; and there was no utility service to the land. Basically, the property had very little value.
Nevertheless, the property was not exempt under any statutory authority. Since the debtor did not reside on the land, he was unable to assert the homestead exemption to protect it, and since the bankruptcy case was filed before New York’s exemption statutes changed a few months ago, the debtor could not utilize any wildcard exemption.
The debtor had hoped to keep the property for sentimental reasons, but realized that cooperating with the trustee and obtaining a discharge of his existing debts was more important.
Nevertheless, the debtor knew that there was very little demand for such lots as there were many of them, and hoped the trustee would just abandon it.
Bankruptcy Trustee Tries to Sell Former Slave’s Land
The Chapter 7 bankruptcy trustee, known in local circles for being rather aggressive about pursuing assets, would do no such thing. The trustee brought an application to retain a local Virginia real estate broker to list and sell the property.
I initially tried to persuade the trustee, who I am friendly with, to abandon the property as having no value to the bankruptcy estate. However, the trustee was somewhat adamant so I assured him that the debtor would fully cooperate with him.
The broker tried to sell the parcels for two years with no success. The trustee did not give up. Earlier this month, he fired the broker and brought an application to retain another one. That application was granted just yesterday.
The Trustee Gives Up
Today, quite unexpectedly, the trustee filed a “no-asset report” – just 24 hours after getting court approval to retain a new real estate broker.
By filing this no-asset report, otherwise known as a “Chapter 7 Trustee’s Report of No Distribution,” the trustee advised the bankruptcy court that there were no assets to be distributed and that the case should be closed as having been fully administered.
What happened in 24 hours? I haven’t spoken to the trustee yet, but my guess is that the trustee finally realized what the debtor had known all along – that the property had very little extrinsic value and that it would be very difficult to sell. Sometimes Debtors Can Keep Non-Exempt Assets in Chapter 7 Bankruptcy Cases .
Out of curiosity I called the broker who acknowledged that this property would certainly be a hard-sell.
Non-Exempt Real Estate Stays in the Family
Consequently, the debtor received his discharge (the court actually granted this over two years ago) and he was able to keep all of his assets – including the land remaining from his great grandfather’s emancipation from slavery – forty acres and a mule.
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About the Artwork: The image is a painting by renowned Atlanta Landscape and Wildlife artist Leonard M. DeFoor. He has some great work! Check out his website.
Written by Craig D. Robins, Esq.The Executive Office of the United States Trustee issued a news release this week stating that the U.S. Trustee just entered into a settlement agreement with Capital One to resolve allegations that the bank attempted to collect on debts that had previously been discharged.
Apparently, a number of consumers across the country filed for bankruptcy years ago, and in the process, discharged their debts to Capital One. When these consumers later filed a subsequent Chapter 13 bankruptcy, Capital One filed a proof of claim in the new bankruptcy case, but on the old debt, even though that debt had been discharged.
Once a debt is discharged, a creditor is forever barred from collecting it, even if the debtor later files another bankruptcy case involving a Chapter 13 payment plan.
The investigation revealed that Capital One filed 15,500 claims totaling approximately $24.7 million on debts that were previously discharged in bankruptcy, and that they received payment of approximately $2.35 million.
The reason for the erroneous claims simply boils down to some very sloppy business practices. Here, Captial One neglected to identify which customers had previously filed for bankruptcy protection — something they should have and could have easily done.
All creditors have an obligation to maintain adequate procedures to ensure that they do not violate the discharge protections that bankruptcy offers. Here, one of the country’s largest banks failed in that regard.
Capital One will refund each consumer or bankruptcy estate with the amount that was improperly collected as a result of the erroneous claim. Consumers and bankruptcy trustees need not take any further action.
In addition, Capital One will also be paying the attorney’s fees of those bankruptcy attorneys who objected to the erroneous claims.
The case that the U.S. Trustee raised this issue in was the In re: Galley Case out of Massachusetts, going back to 2008 (United States Trustee v. Capital One Bank (USA) N.A., Adversary Proceeding No. 08-01272 (Bankr. D. Mass.).
Written by Craig D. Robins, Esq.Tax Refunds can be a big deal when factored into a bankruptcy filing — for two main reasons.
Be Mindful of the Bankruptcy Exemptions for Tax Refunds
First, tax refunds can only be protected up to a certain amount. When you file for bankruptcy, you can protect various assets, and tax refunds is one of them — but only up to a certain amount.
In what is very good news for New York residents, the exemption for tax refunds will increase after January 23, 2011. See: The New, New York Bankruptcy Exemption Statutes for 2011 . I will post a detailed article in the next few weeks about protecting a tax refund while utilizing the new, New York state exemption.
Basically, each person who files who need to protect their home with a homestead exemption, can also protect up to $1,000 worth of cash, money in the bank, and tax refunds.
For those who do not need the homestead exemption, they may be able to use the federal exemptions, which up until now has not been a choice for New York bankruptcy filers. The federal exemptions provide for a wildcard exemption that can enable you to protect other miscellaneous assets up to $11,975 per person That is very generous!
Be Wary of the Effect of the Refund on the Bankruptcy Means Test
Second, the tax refund is considered income for purposes of calculating the means test, and adding the tax refund to the means test can make it harder for some people to become eligible for Chapter . For those filing Chapter 13, a tax refund can result in having to pay a larger Chapter 13 monthly payment. See: How a Tax Refund Can Mess Up Your Bankruptcy Means Test
Tax Refunds and Bankruptcy is such an important topic that last year I devoted an entire week’s worth of posts to the subject: Tax Refunds and Bankruptcy — Everything You Need to Know . I will write a few additional posts this year.
Be Careful How You Spend Your Refund If You Are Planning to File for Bankruptcy
In the meantime, if you get your tax refund, be careful how you spend it. You should not repay any loans to friends or family members because doing so could be considered making a “preferential payment.”
A preferential payment is when you “prefer” a certain creditor, even unintentionally, and that creditor gets more than he or she would have gotten otherwise. If you file bankruptcy within a year of paying back a family member, under certain circumstances, the bankruptcy trustee has the right to sue the family member to recover the money and bring it back into a “bankruptcy estate” so that it can be distributed in a fairer manner to all creditors.
Also, don’t spend the money frivolously by taking a vacation or buying luxury goods. Doing so can be considered inconsistent with the good faith necessary to receive a bankruptcy discharge.
So what can you spend your refund on? Bankruptcy attorney’s fees is one. Many of my clients are able to file for bankruptcy relief in the Spring, because that is when they typically receive their tax refund.
Tax refunds can also be spent on household repairs, car repairs, food, clothing, mortgage or rent payments, car payments, property taxes, fuel oil, child support arrears and some other reasonable items. However, seeking advice from an experienced bankruptcy attorney is your best bet.
Written by Craig D. Robins, Esq.
Today the U.S. Supreme Court gave us another interpretation of the how the means test should be used in bankruptcy cases by deciding that only consumers who have car loans or car leases can claim a certain motor vehicle “ownership expense” deduction on the means test.
Justice Elena Kagen, in her very first decision since ascending to the Supreme Court, ruled in an eight-to-one opinion that the BAPCPA means test is designed to enable creditors to recover as much as possible while ensuring that consumers seeking bankruptcy relief have enough money to maintain a reasonable standard of living.
The case, Ransom v.F.I.A.Card Services, N.A., had been frequently discussed at national bankruptcy symposiums that I’ve attended during the past year. Even though the case is not a victory for the consumer (it is basically a win for the credit card companies), it was not unexpected either. The Supreme Court upheld the decision of the U.S. Court of Appeals for the Ninth Circuit.
Ransom Case Now Governs Who Can Take Ownership Expense Car Deduction on Means Test
What the case means is that only consumers who have a car loan or car lease can take an additional deduction on the means test that car owners whose vehicles are totally paid off cannot take.
This additional means test deduction can sometimes be significant in enabling a consumer to either pass the means test in a Chapter 7 case or pay substantially less in a Chapter 13 case.
The Ransom decision does not change local practice here in New York at all, as consumer bankruptcy practitioners here have customarily only taken the vehicle ownership expense deduction when the consumer debtor had a car loan or lease.
In her ruling, Justice Kagan sought to interpret the language of the means test statute, which provides that a debtor may claim only “applicable” expense amounts. While the law does not define applicable, the Justice cited dictionary definitions such as relevance and appropriate.
In her decision, Justice Kagan also relied on the “statutory context” that in chapter 13 bankruptcy cases, means testing deductions fill in “amounts reasonably necessary to be expended” by above-median-income debtors.
Finally, Justice Kagan noted that bankruptcy law has a “core purpose of ensuring that debtors devote their full disposable income to repaying creditors.”
What Can Consumer Debtors Do to Get Around the Ransom Decision?
Here is how some bankruptcy debtors who do not have financed vehicles, side-step the issue so that they can obtain the additional means test deduction. Instead of keeping an older, non-financed vehicle, they trade it in for a newer car that is financed by a loan or lease. They do this prior to filing for bankruptcy.
Assuming that they engage in this “pre-bankruptcy planning” in good faith, and that they truly need a newer, more-reliable vehicle, then no one should be able to argue that engaging in such a transaction is abusive bankruptcy conduct.
Even Keeping an Older, Non-Financed Car, Results in an Additional Means Test Deduction
In our jurisdiction, the U.S. Trustee permits debtors to utilize a certain additional IRS used car deduction if the debtor’s car is an older car, which is one which is at least six years old. This is because a good part of the means test deductions are based on IRS cost of living deductions.
If a debtor has an older car, then the debtor can take an additional $200 deduction on the means test. This applies even if the car is financed, in which case the debtor can get a double deduction.
Written by Craig D. Robins, Esq.
I just posted breaking news about the Governor Paterson’s unexpected signing of the bill to change the New York Bankruptcy Exemption Statutes. See: New York Bankruptcy Exemptions Suddenly Increased – This Is the Biggest Bankruptcy News in Years!
This Christmas and holiday gift from the outgoing governor is great news for consumers and it will certainly by the major topic of bankruptcy conversation this coming year. The new law, which will help consumers protect more assets than ever before, will certainly lead to many more consumer bankruptcy filings for years to come.
Over Christmas break I prepared a chart outlining the most important changes to the New York exemption statutes that we commonly use for our bankruptcy clients.
There are other changes as well that I didn’t outline, as they never come up. For example, there are also increased protections for cell phones, health aids, food, heating equipment, religious books, etc. However, I have never seen a trustee raise any issue of any kind with such assets.
The Federal Exemptions Come to New York
Perhaps the other major aspect of the new exemption law is that it permits New York residents to choose between the New York exemption statutes and the Federal Exemption statutes which are set forth in Section 522(d) of the Bankruptcy Code.
The federal exemptions have never been available in this state before.
The federal exemptions have some liberal provisions not otherwise available in New York statutes. They provide many additional protections that would be most useful to those consumers who do not need to take advantage of their homestead exemption.
The federal exemptions contain a “wild card” exemption that enables consumers to protect a generous amount of cash.
I will discuss the federal exemptions in future article that I will post later this week.
Chart Containing the Most Important Changes to the New, 2011 Bankruptcy Exemption Statutes for New York
| Existing New York State Bankruptcy Exemptions
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NEW New York State Bankruptcy Exemptions |
Homestead Exemption (note: this can be doubled for married couples filing jointly, who own the real estate together)
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Homestead Exemption (note: this can be doubled for married couples filing jointly, who own the real estate together)
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Motor Vehicle
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Motor Vehicle
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Motor Vehicle equipped for use by a disabled person (new category)
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Cash Exemption if Homestead Exemption is taken
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Cash Exemption if Homestead Exemption is taken
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Jewelry and Art
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Jewelry and Art
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Tools of Trade (these are the working tools and implements that are necessary to carry on one’s business)
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Tools of Trade (these are the working tools and implements that are necessary to carry on one’s business)
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Aggregate Individual Bankruptcy Exemption for Cash, Household Goods and Clothing
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Aggregate Individual Bankruptcy Exemption for Cash, Household Goods and Clothing
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Link to the Actual Bankruptcy Exemption Bill
Here is a link to the actual bankruptcy exemption bill.
New York Bankruptcy Exemptions Suddenly Increased – This Is the Biggest Bankruptcy News in Years!
Posted on
Written by Craig D. Robins, Esq.For New Yorkers considering bankruptcy, the biggest bankruptcy news in five years dropped like a bombshell this afternoon when Governor Patterson unexpectedly signed legislation greatly increasing exemptions for consumers.
Exemptions are those statutes that permit consumer debtors in bankruptcy to keep and protect assets.
New York Residents Seeking Bankruptcy Relief in 2011 Will Be Able to Protect More Assets than Ever Before
This will certainly cause an explosion in the number of consumer bankruptcy cases we will see next year as more financially burdened consumers will be able to eliminate their debts while keeping and protecting all of their assets.
Homestead Exemption Increasing to $150,000 per Person for those on Long Island
Right now each homeowner can protect only $50,000 worth of equity in a house. However, for those on Long Island who live in Nassau and Suffolk Counties, that amount will triple to $150,000.
Since a husband and wife can pool their exemption, that means that a couple will be able to protect a whopping $300,000 worth of equity in their home.
This will enable almost any typical Long Island middle class family to file bankruptcy to eliminate their credit card debts while protecting their home.
In my Long Island bankruptcy practice, I am regularly meeting with homeowners who are forced to file for Chapter 13 bankruptcy instead of Chapter 7 because they have too much equity in their homes. Now, almost everyone will be able to seek Chapter 7 bankruptcy relief and keep and protect their homes.
Incidentally, the amount of the new homestead exemption will be based on what county the debtor’s home is in. For most upstate counties, the homestead exemption will only be $75,000 per person.
More than half of the states previously had more generous homestead exemptions than New York; now it will have one of the best.
Amounts for Almost All Other Exemptions Categories Are Being Increased and New Categories Are Being Added
The new bill also increases the exemptions for a great deal of other assets like cars, and adds some new categories like home computers and vehicles for the handicapped.
Many of the exemption amounts that are being increased had not changed in decades.
I am in the process of reviewing each of the various changes to the exemption laws, and I will discuss and outline them in a post tomorrow.
Proposed Legislation to Expand New York’s Exemptions Has Been Periodically Submitted in Albany for Years
For years, legislation was proposed each and every year in Albany that sought to increase exemption amounts. This legislation never received any publicity because it was periodically struck down and nobody ever expected it to pass.
In years past, when I would discuss this with some of my colleagues, they were surprised to hear that there was pending legislation considering that it wasn’t publicized at all.
Despite reaching various stages in Albany each year for the past decade, such legislation has never found its way into law except once, when the homestead exemption was increased in September 2005. That year it was increased five-fold from $10,000 per person to $50,000 per person. Here’s the article that I wrote about that: Surprise Law Enactment – Homestead Exemption Increased .
The Governor’s Signing of the Bankruptcy Legislation Today Was Totally Unexpected
In July of this year we seemed to get closer than ever before to seeing a change in New York’s woefully inadequate exemption laws.
At that time, both houses of the New York State Legislature passed legislation to increase bankruptcy exemptions in New York State. However, the banking industry, which has an extremely large presence in New York, vigorously lobbied Governor Patterson to veto the bill.
Very few people thought there was any chance that Governor Patterson would sign the legislation into law. For that reason, no one was holding their breath about its passage because nobody expected it to happen.
The Bankers carry a lot of power, even with Democrats. They argued that many consumers owe taxes to New York State, and with the bill’s added protections for debtors, both in and outside of bankruptcy, New York State’s tax collections would suffer.
New York City officials also opposed the legislation, arguing that it would impair the City’s ability to tow and auction cars for outstanding parking violations.
For months, the bankruptcy legislation, which was signed by both houses, just sat on the Governor’s desk, and we all assumed it would die there.
Yet, Gov. Patterson, who is leaving office in just one week, signed the bill today – his very last — with no advance notice and no fanfare of any kind, catching me, as well as all other bankruptcy practitioners, by surprise. And a very nice surprise at that!
Perhaps the Governor, who apparently does not see public service in his future, was upset at the damage wrought by the financial sector which drove the economy into a recession, and used this opportunity to give something back to his constituents.
Governor Patterson Issues Press Release Discussing Why He Signed New Exemption Law
Along with the new law came a press release. In it the Governor said:
“During this time of economic crisis, it is our responsibility as public servants to protect those who are struggling the most.
“A reconsideration of the current exemptions, which in some cases have not been changed in decades, is particularly warranted when an increasing number of individuals find themselves in dire financial condition. Though this is not a perfect bill, the benefits far outweigh its concerns.”
The press release also stated: This bill would provide a much-needed update to the exemptions law in New York as many provisions of State’s exemptions law are antiquated or have not been amended since the 1980’s. The purpose of such exemptions is to permit debtors in bankruptcy to retain a modest amount of personal property and equity in their homes so that they can continue to maintain their lives, and to protect them from becoming homeless, unemployed, or otherwise dependent on the State.
The New and Increased Exemptions Will Help Future Bankruptcy Debtors in Many Ways
Not only will more consumers be able to file for Chapter 7 bankruptcy, but many of those who seek Chapter 13 protection instead will end up paying substantially less through their monthly Chapter 13 plan.
Also, many existing Chapter 13 debtors may be able to convert there cases to one under Chapter 7 and eliminate all further monthly payments.
The bankruptcy attorneys in my office and I will be quite busy reviewing all of our cases over the next few weeks to ascertain how to best take advantage of the new exemptions amounts.
To see a number of post that I’ve written about bankruptcy exemptions, see the articles under this category: Bankruptcy Exemptions.
Written by Craig D. RobinsDebtors in Chapter 7 and Chapter 13 Bankruptcy cases are required to provide certain documents to the trustee prior to the Meeting of Creditors.
Bankruptcy attorneys generally make sure that all of the required documents are collected in advance and furnished to the trustee in a timely fashion.
These items include, as specified in Bankruptcy Rule 4002, sixty days of pay stubs and the most recent tax return. In addition, debtors who own real estate that they intend on keeping must provide the trustee with some kind of valuation or appraisal.
Do Trustees Require Bank Statements?
Bankruptcy Rule 4002 requires the debtor to bring to the Meeting of Creditors all bank and other financial account statements showing the balances in the accounts on the date the bankruptcy petition was filed.
However, not every trustee requires debtors to strictly adhere to this rule. For those cases in the Central Islip Bankruptcy Court, which is in the Eastern District of New York, there is only one Chapter 7 trustee who requires debtors to bring this information to the Meeting of Creditors — Kenneth I. Kirschenbaum.
Mr. Kirschenbaum is actually one of only two Chapter 7 trustees in our district who requires debtors to provide a laundry list of documents prior to going to court. He is the only one who requires debtors to bring bank statements and he sometimes threatens to refuse to examine those debtors who do not.
Even if your trustee is someone else, it is nevertheless a wise idea to bring copies of these statements, especially if there are large amounts in the account, or if you are claiming your homestead exemption, or if you are entitled to a tax refund. In many cases involving these situations, the trustee will ask you to provide the account statements. Turning them over at the meeting of creditors will save you some time and bother.
Incidentally, in many Chapter 13 cases, the trustee will require the debtor to provide copies of the past 12 months of bank account statements.
What Happens If You Don’t Have the Account Statements?
Bankruptcy Rule 4002 provides a solution for those debtors who do not have these documents in their possession. Simply providing a verified statement to that effect will suffice.
So as long as you do not have the documents in your possession, and you state so in writing, you do not have to provide them at the Meeting of Creditors. Be mindful that the trustee may likely require you to obtain and provide copies later on.
For More Information About the Meeting of Creditors
I wrote a very comprehensive post about almost everything you should know about the Meeting of Creditors. Click here to see Going to Your Bankruptcy Court Hearing — The Meeting of Creditors.
Written by Craig D. Robins, Esq.
Businessman debtor denied bankruptcy discharge for failing to keep business records
As a consumer bankruptcy practitioner, I am often concerned with clients who fail to have sufficient paperwork to document their past finances. This often leads to the question: At what point can a consumer debtor be in jeopardy because he or she failed to keep financial documents?
I discussed this issue exactly four years ago in my monthly column in the Suffolk Lawyer when I reviewed an opinion by Judge Stong (sitting in the Brooklyn Bankruptcy Court in the Eastern District of New York), who held in that particular case that the debtor was entitled to a discharge even though she failed to keep a number of important financial documents. See: Recent Decision Summarizes Consumer Debtor’s Obligation to Retain Documents and Explain Pre-Petition Loss of Assets .
In that case the debtor had a good excuse for not being able to produce copies of bank and credit card statements.
However, a judge from the Bankruptcy Court for the Northern District of Ohio just addressed the same issue, although this time for a consumer with business debts, and determined that the debtor in that case was not entitled to a discharge.
In this month’s column I’ll discuss the recent Ohio decision and provide some insight as to when a consumer debtor can face difficulty for not having financial documents.
Businessman Fails to Keep Documents
In the Ohio case, In Re: Kim Wesley Michael, no. 09-3258, (Bankr. N.D.Ohio 2010), the debtor, a businessman, had been involved in at least a dozen different business enterprises over a thirty-year period, six of which he operated in the five-year pre-petition period.
Two of the businesses enabled the debtor to draw compensation in excess of $100,000 per year. The debtor had various roles in these business ventures including sales manager, freelance graphic designer, insurance salesman and concert promoter.
When the debtor ultimately defaulted on some business obligations, he sought Chapter 7 relief.
At the time the debtor filed for bankruptcy relief, he was not employed, no longer involved in any part of his business venture, and had no income.
One particular creditor, who the debtor borrowed $60,000 from for the purpose of financing his most recent business venture, filed an adversary proceeding objecting to discharge pursuant to Bankruptcy Code section 727(a)(3) for failure to keep adequate records.
As it turned out, the debtor failed to maintain any kind of records regarding his most recent business ventures, including the one for which the objecting creditor lent money. As such, the debtor had no check registers, accounting ledgers of any kind, or any other kind of financial records. In addition, the debtor hadn’t filed tax returns for several years.
The bankruptcy court held the debtor to a much higher standard than the average consumer debtor because of his business experience. Thus, the judge determined that the debtor’s inability to explain his financial affairs because he had not kept sufficient records warranted a denial of discharge.
In his decision, the judge explained some basic, but important principles. A bankruptcy discharge is an extraordinary remedy, and carries with it certain duties and obligations.
Only those debtors who are fully cooperative and honest are entitled to a discharge. In that way, a debtor who receives benefits under the Bankruptcy Code must also accept its burdens, and one of them is to be fully transparent with all matters regarding financial affairs.
The Bankruptcy Code Requires Debtors to Maintain Financial Documents
Bankruptcy Code Section 727(a)(3) provides that the court can deny a debtor his discharge if the debtor failed to keep or preserve any recorded information, including books, documents, records and papers. If a party objecting to discharge under this provision can establish that the debtor failed to keep or preserve the necessary information, and can also demonstrate that the lack of financial records makes it impossible to ascertain the debtor’s financial condition, then the objecting party has met its evidentiary burden.
The burden then shifts to the debtor who can still prevail and get a discharge if he can demonstrate that his failure to keep documents was justified under all circumstances of the case.
Some Debtors Are Held to Higher Standards than Others
The court pointed out that a debtor with primarily consumer debts should not generally be held to the same standard as a debtor with mostly business debts. As such, issues of this sort must be reviewed on a case-by-case basis
In this case, the court determined that it should examine the size, complexity and volume of a debtor’s business to ascertain the sufficiency of the debtor’s records. In addition, the court can consider the debtor’s expertise, experience, sophistication and any other circumstances.
Here, the court observed that the debtor had considerable business experience and earned substantial sums of money from the business. Thus, the court inferred that the debtor’s failure to produce any financial documents was because he was attempting to obfuscate his financial dealings.
The court also pointed out that the debtor’s intent to hide or conceal information was irrelevant, nor was it necessary to show that the debtor intended to defraud a particular creditor or the trustee. Instead, the test for determining whether a debtor has adequately justified the lack of financial records is an objective one, focusing on whether others in like circumstances would ordinarily keep financial records.
Practical Tips for Bankruptcy Attorneys When Their Clients Don’t Have Prior Financial Documents
If a client comes to you and presents a problematic scenario because of a lack of prior financial documents, does that mean you should turn down the case or advise against filing? Not necessarily.
As long as you have sufficient documents to enable you to do your BAPCPA due diligence, then no one can fault you for filing the case. However, if the debtor does not even have sufficient written information to enable you to answer the mandatory questions in the petition, then perhaps you should turn down the case.
If a debtor with deficient past financial documents does file, then he can only get into trouble if the trustee or a creditor makes an issue of it. Then, even in a worse-case scenario, if the debtor’s discharge is denied, he would likely be in the same position he was in prior to filing.
About the Author. Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the OCTOBER 2010 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.
Written by Craig D. Robins, Esq.Some people erroneously think that they are not allowed to own any assets after filing for bankruptcy. This is not true.
The purpose behind consumer bankruptcy is to give an honest debtor the opportunity for a fresh new financial start.
The bankruptcy laws recognize that in order to get this start, you must be able to keep a reasonable amount of your possessions, such as a roof over your head, clothes on your back, and a reasonable amount of other possessions — this is all so that you can move forward with your life without becoming a ward of the state.
Various Assets are Protected by Various Bankruptcy Exemption Statutes
There are a number of laws called exemption statutes that indicate what possessions you can keep and protect. Click here to see Bankruptcy Exemptions in New York .
Wondering about keeping your clothes? You shouldn’t — Can They Take the Shirt Off My Back In a Bankruptcy Proceeding?
The exemption statute that protects your home is called the homestead exemption. Several years ago, New York increased the amount of its homestead exemption by five times — Surprise Law Enactment – Homestead Exemption Increased .
Almost all retirement accounts are protected in bankruptcy. That’s why If You’re Considering Bankruptcy, Avoid the Temptation of Borrowing From Your Retirement Account .
To learn more about pensions, see Are Pensions Protected in New York Bankruptcy Cases?
I.R.A. accounts are also protected when filing for bankruptcy. How Much Can You Protect In an Individual Retirement Account (IRA) While Filing Bankruptcy in New York?
Tax refunds are often protected in bankruptcy proceedings. To find out more if yours is, read The Issues to Consider in Determining If a Tax Refund is Protected in Bankruptcy .