Chapter 13 Treatment of Sale Proceeds; Sections 541, 1306

What happens to post confirmation proceeds from the sale of assets vested in the debtor while in a Chapter 13 bankruptcy? Is the debtor able to keep the proceeds, or do they become property of the bankruptcy estate?

In analyzing this question, we begin by looking at the relevant section of the bankruptcy code, which are § need to look at competing sections of the bankruptcy code; most notably 11 USC §§ 541, 1306. Section 541 states “all legal or equitable interests of the debtor in property as of the commencement of the case” and “[p]roceeds, product, offspring, rents, or profits of or from property of the estate.” This is clarified within Chapter 13 cases, as § 1306 states “in addition to the property specified in § 541”, the bankruptcy estate includes all property “of the kind” specified within § 541 “that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted...whichever occurs first.” 11 USC § 1306(a).

To summarize, the above code sections state property of the estate is all property the debtor (1) owns on the date the petition is filed and (2) acquires while the chapter 13 case is pending.

So, if property revested with the debtor upon confirmation is sold, what happens to the proceeds from the sale?

Fortunately, we have some guidance from In re Baker, 620 B.R. 655, 663-64 (Bankr D. Colo. 2020) wherein the court list 5 approaches. The approaches are as follows:

(1) Estate Termination Approach. The court concluded § 1327 vest all property in the debtor at confirmation, therefore the chapter 13 estate terminates at confirmation except as provided for in the debtor’s chapter 13 plan. In re Jones, 420 B.R. 506, 512-13, 515 (B.A.P. 9^th Cir. 2009).

(2) Estate Preservation Approach. In this approach, the estate continues after confirmation, retains all pre-confirmation property, and includes any property acquired by the debtor after confirmation. In re Clouse, 446 B.R. 690, 700 (Bankr. E.D. Pa. 2010).

(3) Conditional Vesting Approach. This is a hybrid approach. Property is simultaneously property of the debtor and property of the estate. Section 1327 gives the debtor “an immediate and fixed right to the future enjoyment of the bankruptcy estate” after the debtor “has faithfully completed his obligations under the plan and is entitled to a discharge.” Woodard v. Taco Bueno Rests., Inc., No. 4:05-CV-804-Y, 206 WL 3542693.

(4) Estate Transformation Approach. The “estate consists of the property and future earnings of the debtor dedicated to fulfillment of the Chapter 13 plan.” This approach does not take into consideration when the property was acquired. In re Root, 61 B.R. 984, 985 (Bankr. D. Colo. 1986).

(5) Estate Replenishment Approach. Pre-confirmation property becomes property of the debtor at confirmation, while post-confirmation property becomes property of the estate. In re Fisher, 203 B.R. 958, 962-63 (N.D. Ill. 1997).

Hopefully this gives you an overview of approaches the courts consider when deciding on how to treat sale proceeds of active Chapter 13 bankruptcies.  These approaches tend to be the bases for courts coming up with their own and sometimes unique approach.  So, if you are thinking of selling an asset in your Chapter 13, make sure to check with a competent bankruptcy attorney in your area to understand the effects of the sale.

Latest Scams

 

 Latest Scams

The internet is full of new and very sophisticated scams and scammers. Some can get past even the most savvy of internet users as legitimate requests. The era of Nigerian princes asking for money though numerous grammatical errors is related to the scamming historical archives.

I have always thought the scams were directed towards the elderly population. However, the Better Business Bureau received more fraud reports from people aged 35 to 44 in 2021 than any other demographic. 

Also, in 2021 the BBB reported military families typically lose more money to these hoaxes than civilians. While non-military victims lose a median of $160 per reported case, a victim associated with military service loses a median of $204.

The Federal Trade Commission has an online database updated every quarter to share the latest fraud statistics reported by service members and their families. Unfortunately, the FTC dashboard reports since 2018, active-duty military service members have lost $87.8 million to scammers.

It appears that stresses that are associated with the life of a military family subject them to being targeted by some of the most compelling scams. Everyone, especially military families, should be aware of two emerging scams, employment scams and ryptocurrency scams 

Employment scams 

Military spouses and veterans, watch out for this scam.

Are you unemployed, or looking for additional income. This may be accompanied with limited education or experience within the field of a job offering.

How do you know if a job offer is legitimate.

There are some red flags to look for. These include suddenly finding an unexplained email in your inbox with a job opportunity. What typically happens in this scam is, after being “hired” (you think?) you will receive a check for more than what you expect to receive. The scammer will say they made a mistake, and ask for money back, but not from your bank account. They will ask for a transfer through a cash app or gift cards. I don’t think I have to tell you what happens when you deposit the original check.

In today’s world of instant gratification, and instant transfer of funds using apps, there is a generation of people that have forgotten it can take time for a check to clear.

The FTC has also received complaints about scams centered around useless paid training programs or job placement services that are a hoax. Also, be aware that if there is a fee associated with training for job placement, it is probably a scam. The employers should be paying the recruiting firms, and paying for training; not the new employee.

Cryptocurrency scams 

This is a new hot bed for scammers, with the target demographic being people from 20 to 49 years old. Over the past couple of years, more that 45K people have lost more than $1 billion dollars in crypto scams. Once the money is gone, it is gone.

These scams can be a little unique, in that they are not trying to hide through sending an email to your inbox. In fact, they do just the opposite, they actively advertise on social media. And sometimes they will send a direct message through a messaging platform.

So, who are they targeting. They are targeting people looking for large returns on their cryptocurrency investments. These are sophisticated operations. They trick their victims into investing, showing large returns. The problem is when you try to get your money out, you can’t.

Before investing money in anything, do your research.

The above information is inspired from and based on an article originally appearing in the October 2022 issue of Military Families Magazine.

Florida Amends F.S. Section 222.25 Increasing Vehicle Exemptions - Vetoed by Gov. DeSantis

If you are filing bankruptcy in Florida and have nonexempt equity in a vehicle, you may want to wait until July 1, 2022 to file.

The Florida Legislature recently amended F.S. 222.25, in pertinent part, adding a section, section 5, that amends the $1,000 vehicle exemption in section 1 to $5,000 for bankruptcy purposes.  

As of today, the state's website indicates it is on the Governor's desk for his signature.  I believe the time for vetoing has passed.  

Assuming there is not a veto, the bill becomes effective July 1, 2022.

For a copy of the bill, see HB265

 UPDATE:  Gov. DeSantis vetoed the bill.

Congradulations to Judge Burgess and Judge Geyer, Florida's Newest Bankruptcy Judges

The Honorable Jason A. Burgess and the Honorable Tiffany Geyer were recently sworn in as the United States Bankruptcy Court for the Middle District of Florida’s newest bankruptcy judges.

 
Judge Burgess was sworn in on March 18, 2022. Prior to his appointment, Judge Burgess practiced at The Law Offices of Jason A. Burgess, LLC, in Atlantic Beach, Florida, and served as Subchapter V Chapter 11 Trustee in both the Middle District of Florida and Northern District of Florida. He will preside in the Jacksonville Division and conduct hearings in Courtroom 4A of the Bryan Simpson United States Courthouse.

 
Judge Geyer was sworn in on March 25, 2022. Prior to her appointment, Judge Geyer was a partner at Baker & Hostetler LLP in Orlando, Florida. She will preside in the Orlando Division and conduct hearings in Courtroom 6A of the George C. Young United States Courthouse.

Assets: Disclose ALL Assets

 When an attorney is preparing bankruptcy documents to be filed with the Court, he or she will most likely ask you what assets you have.  When asked, they asking for all assets, whether legal or illegal, whether in your or someone else's possession, and whether readily apparent or hidden.

On March 21, 2022, Heather Lynn Pratt, a Fort Myers, Florida resident, was sentences for "Fraudulent Concealment of Bankruptcy Assets."  For more information about this case, see the press release "Florida woman sentenced for bankruptcy fraud."

How to Discharge a Student Loan

You may have heard bankruptcy is good for discharging all your debts with a few exceptions.  Among these exceptions are student loans. Well the common thought is student loans are not dischargeable in bankruptcy, there are exceptions to this rule as found in 11 USC Section § 523(a)(8) which says a student loan is only dischargeable if it is an undue hardship. The problem is "undue hardship" is not defined within the Bankruptcy Code.

Fortunately we have a court case from 1987 (in re: Brunner) which attempted to define undue hardship through a test.  This case has been followed by a majority of the courts, and the Brunner Test has been further honed through court cases around the country.  The Brunner Test requires the debtor show by a preponderance of the evidence that:

(1) the debtor cannot maintain, based on current income and expenses, a minimal standard of living if forced to repay his or her student loans;

(2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period for the applicable student loans; and

(3) the debtor has made good faith efforts to repay the loans.

 The test above presents its own challenges. It does not define current income and expenses. For example, it may or may not include income from family or charity, and while many would consider expenses to include shelter, food, utilities, transportation, and healthcare, expenses are not defined in the Brunner Test.

Within the second prong of the test, it doesn't outline what happens if the original payment period has expired.

The third prong fails to establish what happens if the debtor's income is not sufficient to make a good faith effort to repay the loan.  This actually seems to come full circle back to the first prong that includes income, because one's income directly effects ones ability to make "a good faith effort" to repay.

So if you have a student loan you think might be dischargeable under the Brunner Test, you should seek the advice of a competent bankruptcy attorney in your area, as this area of the law is constantly changing.

U.S. Household Debt Increase With Low Delinquency Rate

Unless you live under a rock, you have noticed a tremendous amount of inflation over the last couple of months. This inflation eats directly into one's disposable income when income does not keep up with inflation.

Household debt in the United states hit $15.8 trillion in the fourth quarter of 2021. This is an increase of $333 billion from the previous quarter. Credit card balances were up $52 billion raising the balances to $860 billion. That's the largest quarterly increase the Fed has seen since it's been collecting data over the past couple of decades. This surge was mostly driven by increases in home and car prices.

However, credit card balances are still lower than prepandemic levels, being $71 billion less than they were at the end of 2019.

The consumer price index rose 7.5% in January. Economists predicted that it won't get worse than that in 2022, but it follows a year of inflation that already raised prices on gasoline and groceries. Additionally, real wages have not kept up with inflation. That means there is less cash to spend on their expenses which will likely rack up credit card debt.

At the end of last year delinquency rates were low; only 3.2% of credit card debt was more than 90 days past due, although the feds consider this a "serious delinquency."