Can A Third Party Help Make A Chapter 13 Plan Payment?

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There are a number of requirements that must be met for proposed chapter 13 plans to be confirmed or approved by the bankruptcy court. See Section 1325 of the Bankruptcy Code for all of the requirements. The focus of this article is Section 1325(a)(6) which provides the court shall confirm a plan if, “the debtor will be able to make all payments under the plan and to comply with the plan.” The proposed chapter 13 plan must be feasible or possible. More or less the bankruptcy filer must be able to make the payments proposed in the chapter 13 plan for the entire life of the plan. Usually the plan will last three to six years depending upon the circumstances. So can a third party help make a chapter 13 plan payment each month for the entirety of the plan? The answer is yes under most circumstances.

Yes, A Third Party Can Help Make A Chapter 13 Plan Payment

This issue does not really come up too often for most bankruptcy lawyers. Most courts generally allow third party help, but it is disfavored for a number of reasons. See In re: Schwalb, 347 B.R. 726, 759 (Bankr. D. Nev. 2006. In Schwalb the court held that a debtor may rely on contributions from family and is not prohibited, but disfavored. Of course if the bankruptcy filer can get it done themselves that is much more favorable than having to rely on a third party for money each month. There has to be a firm commitment from the third party to make the contribution each month into the chapter 13 plan. If a third party contribution seems like it is speculative or will only be occasional then the chapter 13 plan can be considered not possible or feasible. The amount of the monthly contribution must be certain too. How can a court confirm or trustee recommend confirmation if the amount of the monthly contribution by the third party is not listed or known? There are a number of factors to consider: (1) the contributor’s relationship to the debtor and motivation in making the contributions; (2) the contributor’s long and undisputed history of making the contributions otherwise providing support for the debtor; (3) the commitment of the contributor to make the contribution in a specific amount for the duration of the chapter 13 plan; and (4) the financial stability of the contributor to make the proposed contribution. The bankruptcy filer and their bankruptcy attorney have the burden of proof in providing evidence to support confirmation of the proposed chapter 13 plan.

Why Would Someone Need Help With Their Monthly Chapter 13 Plan Payment?

The basic problem is the debtor or person filing bankruptcy does not have enough income after paying normal living expenses to meet their obligation under the bankruptcy code to creditors when filing chapter 13 bankruptcy. The bankruptcy filer may only have $100.00 left over each month, but they have taxes that must be paid back in the chapter 13 plan or mortgage arrears that must be paid back in the chapter 13 plan. To pay the unpaid taxes or mortgage arrears the bankruptcy filer, for example, would have to pay $300.00 each month to fund the plan and make it feasible. Again, the bankruptcy filer cannot afford the plan payment, so they obtain third party assistance from a friend or family member. The friend or family member pays the additional $200 a month to make the plan possible or feasible and meet the requirements of Section 1325(a)(6).

Are There Limits To Third Party Help In Chapter 13?

How these issues are dealt with is different from circuit to circuit, district to district and division to division. But generally speaking most jurisdictions allow third party help under most circumstances. In a recent case with third party help proposed, In re Carolyn Deutsh, 2015 Bankr. Lexis, 1368, the Bankruptcy Court actually denied confirmation of the debtor’s chapter 13 plan for not being feasible. What went wrong here? In this case the third party contributor was the debtor’s boyfriend. So, they are not married and the boyfriend is a new boyfriend who says he “intends to contribute only for so long as he is financially able” according to the declaration filed in the case. Okay, can that be relied upon? The bankruptcy court said no. The third party needs to have some sort of tie to the debtor that is not so new it cannot be depended upon. Also the language of the declaration leaves a lot to be said. Why the declaration in Deutsh or less says “I think or guess I will help” instead of “I will contribute $700 a month toward the chapter 13 monthly plan payment for the entire duration of the chapter 13 plan.” There still could have been an issue with the third party contributor being a new boyfriend, but if the language of the declaration had been more concise about the boyfriend’s willingness to help things in the Deutsh may have been different.

The moral of the story is make sure the third party contributor to the monthly chapter 13 plan payment is committed to help, you have known them for some time and the amount they will contribute each months is listed specifically in the declaration prepared and filed with the court.

How Do I Value My Stuff or Property When Filing Bankruptcy?

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Well, there really is no real good answer except do not intentionally undervalue the stuff you own. Value is in the eye of the beholder? Yes, sometimes that is true. Most of the time you just do the best you can and provide the fair market or replacement value of the asset. I do not know how much your used stapler that you bought in 1992 is worth. What about your house? The best we can do is look at comparable sales and how the market is at that moment in time. If the market is hot, like it is in San Mateo County, the listing price could be bid up by thousands of dollars. So was the house worth what it was listed for or what the house sold for?

Be Careful Filing A Chapter 7 Bankruptcy Case If The Client Owns A House

In the Bay Area and San Mateo County home prices are on the rise. So if you own a home and the value is close to what you owe be very careful filing a Chapter 7 bankruptcy. California has generous homestead exemptions to protect equity in primary residences, but what if there is a bidding war on the house and the price is bid up by twenty thousand dollars? Will you still be able to protect the equity and keep the house or will the house be sold out from under you in the chapter 7 bankruptcy case? The Chapter 7 Trustee assigned to the case will want to list the house for sale and let the market determine the value and see what happens. The Chapter 7 Trustee has a duty to administer the bankruptcy estate and liquidate unprotected assets for the benefit of creditors. Liquidating and disbursing funds to creditors is also how chapter 7 trustees make more money. Chapter 7 trustees get paid a percentage of the assets disbursed to creditors. So not only does the chapter 7 trustee have a duty to investigate your assets and liquidate them, but they have a financial interest in liquidating unexemptable assets also. If the chapter 7 trustee does seek to list the property for sale you can try and buyout the bankruptcy estate, oppose the listing of the property for sale or convert the case to Chapter 13 and pay the equivalent unprotected equity to creditors over 3 or 5 years to make sure you keep the home.

Do Not Intentionally Undervalue Your Assets

So after reading the preceding paragraph you may have the thought that you can just decrease the value of the asset to an amount that can be protected. Please delete that thought and never think it again. It is a dangerous game to play if you choose to manipulate the value of your assets. Just ask Jesus Bencomo. Mr. Bencomo filed for bankruptcy protection under Chapter 7 of the bankruptcy code for the first time in May of 1998. No real property was listed in his first bankruptcy case. On January 16, 2013, Mr. Bencomo’s bankruptcy lawyers filed his second Chapter 7 bankruptcy case listing in Schedule A that he owned real property located in Norwalk, California. Mr. Bencomo valued the real property at $175,000 with secured debt totaling $145,879. So there is approximately $29,121 in equity to protect. After the conclusion of the 341(a) Meeting of the Creditors the duly appointed Chapter 7 Trustee Wesley Howard Avery filed a motion with the court to employ a real estate broker to list and sell Mr. Bencomo’s house.

The trustee’s motion provides the value of the Norwalk property as around $305k to $333k. Two weeks later Mr. Bencomo’s bankruptcy attorneys amended the Schedule A to list the value of the Norwalk property as $245,000 with secured debt now totaling $214,929.27. Eventually the court approved the employment of the real estate broker.

The Chapter 7 trustee also filed an adversary proceeding, lawsuit in conjunction with the main bankruptcy case, objecting under Section 727(a)(2)(A) and (a)(4)(A). Section 727(a)(4)(A) provides that the debtor’s discharge may be denied where: (1) the debtor made a false oath in connection with the bankruptcy case; (2) the oath related to a material fact; (3) the oath was made knowingly; and (4) the oath was made fraudulently. Retz v. Sampson (In re Retz), 606 F.3d 1189, 1197 (9th Cir. 2010) (citation and internal quotation marks omitted). The adversary proceeding complaint alleges that Mr. Bencomo is an experienced real estate broker and therefore knew at the time of filing that the value of the Norwalk property was in the $300k range. Basically the Chapter 7 trustee is arguing Mr. Bencomo knowingly and intentionally undervalued the Norwalk property. Mr. Bencomo’s conduct in his first bankruptcy case became an issue in the second. Apparently Mr. Bencomo transferred the house out of his name, than back into his name, but failed to record the deed until 2002 and he failed to list the property in his first bankruptcy petition. Evidence of Mr. Bencomo’s prior bad conduct in the first case can be used in the second as impeachment evidence. So, the court ruled in the chapter 7 trustee’s favor and held that Mr. Bencomo knowingly made a false oath regarding the value of his house and that this is material. Mr. Bencomo was denied a discharge.

California Bankruptcy Exemptions May Increase Soon

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In California we have two set of exemptions to protect assets against collection efforts by creditors. There are limits to what can be protected and how much of the value of the asset can be protected. Under CCP Section 703 the defining feature of this set of exemptions is the Wild Card exemption that can be applied to anything under Section 703.14(b)(5) totaling $26,925.00. This Wildcard exemption can be used to protect equity in a home too. The other set of California exemptions under CCP Section 704 include homestead exemptions with higher limits. Recently the California State Senate passed SB 308 that proposes a number of great changes to California’s exemptions. One of the most important proposed changes is the exemption that protects equity in a primary residence. Right now the homestead exemptions in California to protect equity in a primary residence are: (1) single person $75,000; (2) married or have dependent children living in residence ($100,000); and (3) debtor is a senior 65 or older; disabled, or 55 years of age or older and has limited income. California Senate Bill 308, among other things, would change California’s exemptions to give everyone a $300,000 homestead exemption to protect equity in their primary residence. If California’s exemptions are changed as proposed in SB 308 California’s residence in financial distress will get little more help in recovering or staying afloat.

California Homestead Exemption Changes Under CCP Section 704 Exemptions

1. Homestead Exemption Limit Increased To $300,000

This is probably the most dramatic proposed change to the California exemption system. As the current limits are listed above an increase to $300,000 for everyone is a significant increase, especially for a single person. At the same time California’s exemptions have not kept pace with inflation and the cost of living in California. If you review the history of the increases in California’s exemptions you will clearly see the increases have not kept pace with California’s cost of living and inflation.

2. Removes The Six-Month Reinvestment Requirement

Right now CCP Section 704 homestead exemptions requires after sale of the home and the former owners receive the exemption amount of the proceeds they will lose the entire exemptions if they do not reinvest the proceeds in a new home. So if the bankruptcy trustee sells the home the debtors have six months from the sale date to reinvest the proceeds. Okay, but they just filed for bankruptcy and that means they most likely do not have the best credit. So how is someone supposed to qualify to purchase a new home? This is a badly needed change also. I far as I know exemptions are meant to protect assets to help someone in financial distress. Pulling the rug out from under someone in financial distress six months later does not seem to be consistent with the underlying goal of having exemptions to begin with.

Increase The Vehicle Exemption to $6,000 For Everyone

Right now under the CCP Section 703 vehicle exemption the limit of the exemption is $5,100 and under CCP Section 704 the vehicle exemption limit is only $2,900. These exemptions are badly in need of an increase. As a society we need everyone to be able to move about with reliable transportation period. It does not do anyone any good to someone with a car that cannot allow them safely to and from work or transport children. A $6,000 vehicle is usually just on the line of reliability anyway and getting up there if miles. This proposed increase will provide a modest increase in the type of vehicle that can be protected and is badly needed.

New Exemption for Small Business Owners

Right now a small business owner does not have a specific exemption to protect cash or deposit accounts, accounts receivable and business inventory up to $5,000 for debtors using the CCP Section 704 exemptions. For small business owners choosing the 704 exemptions this will be valuable addition to help them continue to operate their business and achieve success after bankruptcy. The limit of the proposed exemption is extremely reasonable at $5,000. This amount should not result in giving a windfall to a small business owner.

Amends California Code Section 2983.3 Regarding Vehicle Loans

Right now the law provides a person with a vehicle loan when filing bankruptcy has three options regarding the loan. They can surrender the vehicle to satisfy the loan, enter into a reaffirmation agreement and continue payments, or redeem the vehicle for its fair market value under Section 721 of the bankruptcy code and keep the vehicle. What is not supposed to be allowed anymore is someone just continues to make the payments and does not do either of the three options listed above. They are current with the payments, but technically under the law the lender can repossess the vehicle since the loan was not reaffirmed. This change would make the filing of bankruptcy not grounds for repossession if the person is current with their payments.

What Will These Proposed Changes Mean To Bankruptcy Attorneys and Their Clients?

The ramifications will most likely be far reaching and help thousands of California residents live happier and healthier lives by obtaining a fresh start. Regarding the increase in the homestead exemption, most bankruptcy attorneys will most likely see a decrease in the number of Chapter 13 cases they file given that same bankruptcy filer can protect more equity in their home and still file a Chapter 7 case. Currently one of the reasons to file a Chapter 13 case is to protect equity in a home while reorganizing debts and not have to liquidate the home in a Chapter 7 case. More people should qualify to file a Chapter 7 case if the homestead exemption is increased. At the same time the dynamic between someone’s assets and the available exemptions is complicated and there are compromises that have to be made given the limits to the amounts of the exemptions. Then you factor in the differences between the two sets of exemptions, CCP Section 703 and CCP Section 704, and bankruptcy lawyers will have a whole new evaluation to make when discussing which set of exemptions would be most advantageous.

In all these proposed increases will not provide windfalls, but make California’s exemptions consistent with the real world we live in. When pondering a perfect world I believe the exemption limits should be based upon a county by county measurement of income and cost of living. To truly treat everyone fairly based upon their circumstances we need to look at their circumstances more closely at the county level. In California the median income and cost of living vary widely throughout our huge state. Creating exemptions by county would be a huge undertaking and probably unmanageable by the bankruptcy courts. For now the increases of California bankruptcy exemptions proposed in California State Senate Bill 308 would be a huge and long needed improvement.

Potential Lawsuit Claims Need to be Listed When Filing Bankruptcy and Are Part of the Bankruptcy Estate

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Preparing a bankruptcy petition and filing for bankruptcy is actually a much more complicated process than most believe. Of course there are certain cases that really do not require too much work, but even those cases could have hidden landmines. One of the landmines I speak of is a bankruptcy filer’s claims or potential claims against a third party for damages (Money!!!). Most clients do not think about a potential claim as part of their assets. It is just the right to sue so . . . . . . . . The claim or potential claim could derive from an employment issue at work, slip and fall at a store or business, fraud, breach of contract or other way any of us can be hurt financially and potentially have a claim against a third party. Yes, your right to sue someone is a claim that should be listed in the bankruptcy petition schedules and could have value to be protected depending upon the circumstances. What happens if a claim is not listed in the bankruptcy petition schedules? A recent Ninth Circuit Bankruptcy Appellate Panel case discusses the treatment of an unlisted claim when the bankruptcy filer, after discharge and the case was closed, attempts to enforce the claim by filing a lawsuit. Goldstein v. Alberta P. Stahl, Chapter 7 Trustee; Wells Fargo Bank, N.A.; Bank of America, N.A.; BAP No. CC-14-1346-TaDPa, March 3, 2015.

What are Claims?

A claim when filing for bankruptcy is defined as the right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.

So a potential claim is the potential right to payment for damages that you have not yet filed a lawsuit for and obtained a judgment is an unliquidated and most likely disputed claim. A claim no less though. Sierra Switchboard Co. v. Westinghouse Elec. Corp., 789 F.2d 705, 707 (9th Cir. 1986)

Property of the Bankruptcy Estate

Section 541 of the Bankruptcy Code provides what is property of the estate. Part of the definition includes: Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date, by bequest, devise, or inheritance; as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree; or as a beneficiary of a life insurance policy or of a death benefit plan.

As you can see this definition includes all property at the time the case is filed to be listed in the bankruptcy schedules. In the Goldstein case one of the issues was whether the right to sue their mortgage companies arose prior to the chapter 7 bankruptcy case being filed. Of course the Goldstein’s bankruptcy attorney argued the right to sue arose after the case was filed. The mortgage companies bankruptcy lawyers argued the claims arose before the chapter 7 case was filed.

Goldstein v. Alberta P. Stahl, Chapter 7 Trustee; Wells Fargo and Bank of America

Long story short the bankruptcy filer’s in this case, the Goldstein’s, applied for a loan modification prior to filing for relief under chapter 7 of the Bankruptcy Code. They fulfilled the terms of the temporary loan modification but their mortgage company never provided them a permanent loan modification. The Goldstein’s paid over $22,000 in mortgage payments in reliance upon their mortgage companies offer to modify their mortgage though. This is the claim the Goldstein’s allegedly had at the time their chapter 7 case was filed against their mortgage companies. For whatever reason the Goldstein’s did not list this claim in their bankruptcy schedules and their case was discharged and closed. The Goldstein’s then sued their mortgage companies for the mortgage payments and other causes of action. Their mortgage companies used the defense that the claim was not listed in their bankruptcy schedules so the claim was actually still property of the bankruptcy estate and could not be pursued by the Goldstein’s. The Goldstein’s then reopened their bankruptcy case to add the claim to their schedules. As part of reopening the bankruptcy case a chapter 7 trustee was appointed to the case again. The Goldstein’s mortgage companies then entered in to negotiations for the settlement of the claim with the chapter 7 trustee and sought to extend the deadline for the chapter 7 case to close again. Eventually the chapter 7 trustee filed a motion to compromise the claims or sell the claim free and clear. The Goldstein’s opposed arguing the claims did not become complete until their mortgage companies denied the permanent loan modification two weeks after the bankruptcy case was filed. Given that the claims should not be part of the bankruptcy estate. The bankruptcy court held the alleged breach by the mortgage companies was before the bankruptcy case was filed when they failed to grant a permanent loan modification. To determine when a cause of action accrues, and therefore whether it accrued pre-bankruptcy and is an estate asset, the Court looks to state law.” Boland v. Crum (In re Brown), 363 B.R. 591, 605 (Bankr. D. Mont. 2007) Under California law a cause of action accrues upon the occurrence of the last element essential to the cause of action.” Howard Jarvis Taxpayers Assn. v. City of La Habra, 25 Cal. 4th 809, 815 (2001) The Ninth Circuit Bankruptcy Appellate Panel upheld the bankruptcy court’s ruling that the claims are property of the estate. The panel noted that the third mortgage payment was made by the Goldstein’s prepetition and that is when they could have brought their lawsuit at that time.

Here is the Real Problem With Payday Loans and Why They Should Be Illegal

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I keep reading articles about cities trying to regulate payday loan companies with land use restrictions and other measures. While that is great news I cannot help but think payday loan companies should just be illegal altogether. States like California should just revoke payday loan companies’ corporate status and cities should revoke their business licenses. Why is it so hard to regulate what clearly is a horrible business model for those who are the consumers facing financial difficulties?

What Happened to the Time Honored Ways to Get Short-Term Money?

There have been time honored ways to obtain short-term loans when things go sideways. The first is primarily friends and family members that do not charge immoral interest rates and work with their relative or friend to get paid back. The second way is pawn shops that also do not charge immoral interest rates and are highly regulated. A third option is getting an advance from your employer. These are the time honored ways to get short-term money to get by. Today, payday loans are charging people immoral interest rates and making matters worse for people who obtain the loans. I have witnessed an interest rate of 1,000% in writing from a payday loan company. How can this be legal?

The Real Problem: People/Customers Who Get Payday Loans Have No Voice

What do I mean when I say they “have no voice?” It means justice is not free and you have to have money to get justice in this world. Sorry if this is the first time you have been told this, but it is the cold hard truth. Bankruptcy attorneys and attorneys in general can less and less go out on a limb and take cases on for a contingency fee. Even in contingency fee agreements the expenses for the litigation of the case are paid for by the client normally. Do you know how much it costs to sue for your rights being trampled? In San Mateo County the filing fee for a limited civil lawsuit ($10,000 or less in damages alleged) is $240.00 plus serving the lawsuit on the party you are suing. There are ways to serve the summons and complaint for free. Did I hear someone say small claims court? A small claims court complaint costs $181.00 to file in San Mateo County. Yeah, well, that is an option, but I have not witnessed people actually following through with doing it themselves and then enforcing the judgment to get paid if successful. Remember you do not just get a check when you get a judgment. You have to then spend time and money to satisfy the judgment. If someone is getting a payday loan they do not have the money for any of this and probably do not have the time either. How does someone take a day off from work or more for small claims court to just reduce their income further causing more hardship?

What happens when the person does not pay on time? The payday loan company violates the law when attempting to collect the debt. They harass people at work, tell them they are going to be arrested and they will go to jail, call their family members and harass them. What do people do when their rights are violated and crimes are committed against them by these payday loan companies? Not a damn thing. They have no money so they have no voice. They are just trying to keep food on the table and a roof over their head. It just keeps going on and on like this until they get sick of it and come to someone like me. I file bankruptcy for them and now there is an enforceable order of discharge to hopefully make it all go away. No more 500% interest rate. No more phone calls. No more harassment of their relatives. No more phone calls to their work.

Payday Loan Companies are the Worst When Trying to Collect

But wait, it actually does not stop there sometimes. I can tell you as a bankruptcy lawyer that the most likely creditors that mercilessly harass our clients long after an order of discharge is entered are payday loan companies and their collection agencies. Just like clockwork while I am writing this article I received a phone call from a client that we filed chapter 7 bankruptcy for about two years ago. She received a harassing phone call from a collection agency. When I say harassing I mean the person was yelling at her and being very rude. She received multiple calls at work and on her cell phone. She was told that she has two felonies against her and she would be put into jail if she did not pay them $1,900.00 immediately. I have read there are people impersonating the Internal Revenue Service doing this same thing. In this case though the collection agency was collecting a debt for guess who? It was a payday loan company. So the payday loan company fully knowing the debt was discharged in the chapter 7 bankruptcy case sold/assigned collection of the discharged debt to this ruthless law breaking collection agency. It happen all the time and more often than not the original debt was from a payday loan company.

What Can A Creditor or Party In Interest Do In My Bankruptcy Case To Cause Problems?

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First, what a creditor can do usually does depends upon the chapter of the bankruptcy code you choose to file under. This article will only address some of the things a creditors can do under chapter 7 and chapter 13 of the bankruptcy code. Generally speaking most unsecured creditors to not participate in the average bankruptcy case unless there are allegations of fraud or improper conduct by debtor regarding the extension of credit or the use of the credit account by the debtor. Secured creditors usually do participate in most bankruptcy cases given the person filing for bankruptcy protection has possession of the collateral securing repayment of the loan or debt. Another class of creditors, creditors with unsecured priority claims, may participate depending upon the chapter that is filed.

What if there is an allegation of fraud or some improper conduct?

Once a chapter 7 or chapter 13 case is filed a notice of the bankruptcy case, meeting of the creditors and deadlines is served by the bankruptcy court all on creditors listed in the bankruptcy petition. This notice has a number of dates and deadlines listed on it. One of the most important deadlines is the date to object to the debtor’s discharge or to challenge the dischargeability of specific debts. Under Section 727 of the bankruptcy code a party in interest may object to the debtor receiving a discharge in the bankruptcy case. Under Section 523 a creditor may try and prove that the debt owed to them specifically should not be discharged. This deadline is 60 days after the date of the first schedule meeting of the creditors. The meeting of the creditors is usually held approximately 30 days after the bankruptcy petition is filed. That means there is about 90 days for a creditor or party in interest to conduct an investigation regarding the bankruptcy filer’s income, expenses and assets if there is an allegation of fraud or improper conduct. In the 9th Circuit the 60 day deadline is a hard deadline. If a creditor or party in interest does not file their adversary complaint within that deadline it will most likely be dismissed as late filed. An extension of the deadline to file an adversary proceeding can be requested and granted by the court for cause, but do not expect the deadline to be extended if you have done nothing in the case and waited until the last minute to participate in the bankruptcy case. It is not fair to the debtor for the 60 day deadline to be extended because a creditor’s bankruptcy lawyer or party in interest was lazy, incompetent or negligent in investigating the financial condition of the debtor timely. The Supreme Court of the United States has made it clear that a debtor is entitled to the expeditious handling of all matters regarding discharge. See Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992).

The first opportunity to ask questions by a creditor is at the 341 meeting of the creditors

The first opportunity to cause a problem is at the meeting of the creditors. It really is not causing a problem because that is what the meeting of the creditors is for, for creditors to come ask questions and determine if there are any issues to raise or allege the debtor is not entitled to a discharge of their debts, or the debt specifically owed to the creditor for some reason. The meeting of the creditors is a limited forum to ask questions though. In both chapter 7 or chapter 13 cases a creditor will only be given around 5 minutes or less to ask question of the debtor. There are many cases on the calendar and trustees have to keep the calendar moving to a certain extent. If the questions asked by a creditor or their attorney truly raise issues the trustee is interested in the questioning may take longer and the trustee may jump in to question the debtor more too. If a creditor wants to continue their investigation they will need to file an application for a Rule 2004 examination of the debtor.

Rule 2004 Examinations

A rule 2004 examination refers to the section of the bankruptcy code that allows for a party in interest and/or creditor to depose the debtor and request documents. A rule 2004 examination is a very powerful tool because it has a broad scope of what can be requested of the debtor. A rule 2004 has been described as a “fishing expedition” given the broad nature. The scope of the examination may encompass “the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor’s estate, or the debtors right to a discharge period.” See Rule 2004(b). The extent of the inquiry under Rule 2004 is intended to be very broad and permits the party invoking it great latitude of inquiry. See In re Valley Forge Plaza Assoc., 109 B.R. 669, 674 (Bankr. E.D. Pa. 1990). Furthermore, examinations under rule 2004 are allowed for the purpose of discovering assets and unearthing funds.” See 8 Collier on Bankruptcy, 2004.4, 2004-10 (15th ed. 1993).

The actual filing of an adversary complaint under Section 523 or Section 727 of the Bankruptcy Code

A creditor or party in interest may skip attending the 341 meeting of the creditors or conduct as rule 2004 examination of the debtor altogether. I a creditor or party in interest has all the cause or evidence they feel they need to initiate a lawsuit that may do just that. The standard to survive the complaint being dismissed is not a strict standard. To survive a motion to dismiss for failure to state a claim upon which relief can be granted, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. See Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). Once the complaint is filed a creditor or party in interest will begin the discover process and try and obtain additional damaging documents or information through the discovery process in the adversary proceeding. Whether a creditor or party in interest is successful in taking away a debtor’s discharge entirely or having a specific debt deemed not discharged depends upon many factors and ultimately a favorable ruling by a bankruptcy judge. The goal when filing bankruptcy is to have an issue free case that results in the relief initially sought, an order of discharge signed by the bankruptcy court.

What Can I Do If A Frivolous Appeal Was Filed Against Me After I Won?

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It is not uncommon for daily news channels to report on the Supreme Court of the United States holdings or decisions on cases they choose to hear and rule on. Of course SCOTUS holdings effect all of the United States of America. In the lower district courts throughout the United States and bankruptcy appellate panels there are many appeals each heard and decided each month. These decisions do not always get a lot of attention. Appeals of decisions, judgments or orders issued by lower courts are absolutely a necessary part of our legal system and in bankruptcy law under the Federal Rules of Procedure. It is how laws are interpreted under immense scrutiny and appeals provide all us a better understanding about when and what laws apply to. But are all appeals necessary or well intentioned? No, they certainly are not. Appealing a lower court’s final order or judgment should be considered very carefully. Some appeals are frivolous and are only designed to delay the inevitable or try and inflict one last punch to the gut to incur additional attorneys’ fees and costs. What can I do if a frivolous appeal is filed after I won?

First, discuss with your bankruptcy lawyers whether the appeal is frivolous or if there truly is a reason to file a motion to award damages. Federal Rule of Appellate Procedure 38 provides: If a court of appeals determines that an appeal is frivolous, it may, after a separately filed motion or notice from the court and reasonable opportunity to respond, award just damages and single or double costs to the appellee. 28 U.S. Code § 1912 is a little different, it provides for damages and costs on affirmance where a judgment is affirmed by the Supreme Court or a court of appeals, the court in its discretion may adjudge to the prevailing party just damages for his delay, and single or double costs. FRAP 38 can provide damages without the showing of delay, just frivolousness.

So what is a frivolous appeal that warrants damages and attorneys’ fees and costs? What is delay that warrants damages and attorneys’ fees and costs?

A court of appeals has the discretion to impose damages against litigants as a sanction for bringing a frivolous appeal. See Maisano v. United States, 908 F.2d 408, 411 (9th Cir. 1990). Okay, so what is a frivolous appeal? According to the Maison case, an appeal is frivolous if the results are obvious, or the arguments of error are wholly without merit. More or less you did not have a short of overturning the lower court’s decision and you should have known it from the start. To receive damages for the filing of a frivolous appeal a motion or notice from the court with a reasonable amount of time to respond must be provided. See Gabor v. Frazer, 78 F.3d 459, 459-60 (9th Cir.1996).

A court of appeals may on its own accord issue an order to show cause why the court should not award attorneys’ fees and double costs if the arguments in the appeal are without merit. Moreover, the court of appeals can impose the award of damages jointly and severally against the client and their attorney. See Int’l Union of Bricklayers Local 20 v. Martin Jaska, Inc., 752 F.2d 1401, 1407 & n. 8 (9th Cir.1985). Joint and several liability means the party that is awarded damages may collect the full amount of the damages from either party no matter what their share of the liability for the damages is. Damages for frivolous appeals can be imposed joint and severally given that the client and attorney are in the best position to determine who caused the appeal to be filed and fairly apportion who is at fault.

In a published opinion from the Ninth Circuit Court of Appeals on July 13, 2010, In Re: THOMAS V. GIRARDI, Esq.; WALTER J. LACK, Esq.; PAUL A. TRAINA, Esq., et al., Nos. 08-80090. These Los Angeles attorneys were significantly sanctioned for a frivolous appeal. The sanctions were imposed as follows:

– Respondents Thomas V. Girardi and the Girardi Firm shall reimburse Defendants Dow Chemical Company, Dole Food Company, and Shell Chemical Company (collectively, “Defendants”) their attorneys’ fees and costs, but not to exceed the aggregate sum of $125,000.00.

– Respondents Walter J. Lack and the Lack Firm shall reimburse Defendants their attorneys’ fees and costs, but Lack’s individual liability shall not exceed the aggregate sum of $250,000.00.

– Respondent Paul A. Traina shall reimburse Defendants their attorneys’ fees and costs, but not to exceed the aggregate sum of $10,000.00

– Respondent [the young associate] shall reimburse Defendants their attorneys’ fees and costs, but not to exceed the aggregate sum of $5,000.00.

– Respondent the Lack Firm shall be jointly and severally liable for the sanctions imposed on Respondents Traina and the young associate so that its aggregate liability shall not exceed $265,000.00.

– Respondents aggregate liability to each Defendant shall not exceed $130,000.00, or said Defendants’ actual attorneys’ fees and costs, whichever is less.

Depending Upon Your Circumstances Your Tax Refund Can Be Protected When Filing for Bankruptcy

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It is that time of year again. It is time to get your income documents together and figure out how much you owe to the government or how much of a refund you will receive. If you receive a tax refund each year from the Internal Revenue Service or the Franchise Tax Board it can be protected when filing for bankruptcy whether your file a Chapter 7 or Chapter 13 bankruptcy case.

When filing for bankruptcy protection the bankruptcy estate includes all legal or equitable interests in property. See Section 541(a)(1) of the Bankruptcy Code. Just because you have not received the tax refund yet does not mean it is not an asset of yours that should be listed in your bankruptcy petition in the schedule of assets, Schedule B. Whether you can protect the refund depends upon your other assets and the exemptions available to protect your assets. Exemptions protect your assets by exemption or removing your assets from the bankruptcy estate so that you can keep your assets to live life and continue to go to work and live. For example, California has a generous wild card exemption worth $26,925.00. This exemption can be applied to any combination of assets like bank account balances, tax refunds, high value household goods, vehicles or any other asset. Most state’s exemptions provide a limited amount for vehicles. If you have more than one paid in full vehicle in California you will most likely have to use some of the wild card exemption to protect both vehicles and remove them from the bankruptcy estate. So let us look at some numbers. If you have $12,000 in your bank accounts, a second vehicle that is paid in full and worth $7,500, a television worth $2,000 (just bought it on Black Friday), and an anticipated tax refund from the IRS and FTB of $5,300 you will max out the wild card exemption mentioned above. All of the assets just listed above will be exempted/protected/removed from the bankruptcy estate and you should keep all of it while still filing for bankruptcy protection. Different states have different limits to protect assets. So your state may not have as generous of exemptions. The bottom line is for your tax refund to be protected/exempted it should be listed in Schedule B and exempted by an applicable bankruptcy exemption so that you can keep the tax refund when you receive it.

Make sure you protect and keep your tax refund when filing bankruptcy.

Make sure you protect and keep your tax refund when filing bankruptcy.


In re Brittany Le’von Miller; Tax Refunds and Abandonment of Estate Property

Tax refund issues were just highlighted in a recent unpublished United States Bankruptcy Appellate Panel of the Ninth Circuit case, Case No. AZ-13-1307-JuKiD, In re Brittany Le’von Miller. For starters the debtor in this case filed her bankruptcy petition in August 2012, on October 25, 2012 the Chapter 7 trustee filed the notice of no distribution, debtor received her discharge and the case was closed and on May 9, 2013, over six months after filing the notice of no distribution, the Chapter 7 Trustee received the debtor’s tax refund totaling $3,259.00 directly from the Internal Revenue Service.

In this case the debtor in her originally filed schedules listed her expected tax refund in Schedule B with a value of “unknown.” The Chapter 7 trustee subsequently filed their notice of no distribution and the Chapter 7 case was discharged and closed. The notice of no distribution provides some case details and it says there are no assets to distribute for the benefit of creditors in the case. After the deadline for creditors to object to the discharge of the debtor’s debts has run out the bankruptcy court will sign the order of discharge and the Chapter 7 case is closed. When the case is closed Section 554(c) says all property is abandoned to the debtor. This is what happened in this case, but then the Chapter 7 trustee received the debtor’s 2012 totaling $3,259.00 refund directly from the Internal Revenue Service. Before going further, there is a question that is unanswered and unexplained. Why did the Internal Revenue Service send the debtor’s 2012 tax refund to the Chapter 7 trustee at all?

After the Chapter 7 Trustee received the 2012 tax refund the trustee immediately tried to reopen the Chapter 7 case and revoke/withdraw the notice of no distribution of assets. The debtors bankruptcy attorney argued the tax refund was abandoned upon the closing of the bankruptcy case. The trustee argued that Section 544(d) applied or inadvertent mistake as to filing the notice of no distribution. Apparently the bankruptcy court granted the Chapter 7 trustee’s motion and the debtor appealed. For an asset to be abandoned under Section 554(c) four requirements must be met: (1) the tax refund must have been properly scheduled; and (2) not administered by the trustee; (3) debtor’s case must close; and (4) abandonment is to the debtor. See DeVore v. Marshack (In re DeVore), 223 B.R. 193, 197 (9th Cir. BAP 1998). The court also recognized in Devore that the court has discretion to modify or revoke and technical abandonment under Section 554(c).

In the this particular case the Ninth Circuit Bankruptcy Appellate Panel held that the bankruptcy court needed to make findings of fact and law that could be reviewed and not just make a ruling with no explanation as to how it was arrived at. That did not happen, so this issue was remanded back to the original bankruptcy court for further findings. Time will tell what the outcome will ultimately be.

What Could The Debtor Have Done Differently?

The debtor arguably could have listed an estimated value of the tax refund. Would this have prevented the resulting problems from arising? Who knows, but at least the Chapter 7 trustee would have had a number to work with and evaluate the if creditors could be benefited. The debtor’s filed Schedule C clearly provided only 60% of her expected 2012 tax refund could be protected.

What Could The Chapter 7 Trustee Have Done Differently?

The Chapter 7 Trustee could have continued the 341 meeting of the creditors for the debtor to amend the Schedule B and actually list a value of the expected 2012 tax refund. It is unclear whether the Chapter 7 trustee questioned the debtor at the 341 meeting of the creditors as to potential value of the expected 2012 tax refund. Also, the Chapter 7 trustee could have not filed the notice of no distribution and held the case open until the amount of the 2012 tax refund was known and certain.

Possible Benefit to Creditors of the Bankruptcy Estate?

For some additional perspective, the amount of the 2012 tax refund that is not protected and available to administer by the Chapter 7 trustee is a total of $1,303.60 (40% of the 2012 refund totaling $3,259.00), of which the Chapter 7 trustee is entitled to $325.90 (25% of the $1,303.60, of the unprotected assets to be distributed for the benefit of the debtor’s creditors). So without deducting additional administrative costs, like postage for example, the debtor’s creditors in this Chapter 7 case could potentially share a pro-rata distribution of around $977.70. That is if the bankruptcy court allows the case to be reopened and the revoking of the Chapter 7 trustee’s notice of no distribution. Time will tell.

Is it Okay to File Multiple Bankruptcy Petitions Over and Over Again and What are the Possible Repercussions?

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I found the all-time record holder for the most bankruptcy petitions filed I have ever witnessed. I have redacted the person’s name even though it is technically a public record. This individual has filed 14 Chapter 13 bankruptcy petitions and 1 Chapter 7 petition since 2009. Yes, 15 total separate bankruptcy petitions for relief and they all have been dismissed for one reason or another except the most recent filing. Please see the cases and dates filed at the end of this article. I cannot think of a reason why someone would file this many petitions for relief and actually obtain some sort of value for it. So is it okay to file 15 petitions for relief in five years under the Bankruptcy Code? I cannot specifically answer that question for this person given I do not know the bankruptcy filers circumstances or facts surrounding the many filings. What I do know is this person may have spent a lot of money on filing fees (possibly exceeding $4,000.00, unless a fee waiver or installment payment was made for the filing fee) and used a lot of the Chapter 13 trustee and courts time to administer these cases before dismissal. This article will discuss the effect on the automatic stay regarding multiple bankruptcy filings and the possible repercussions against someone that files this many petitions for relief in such a short period of time.

Multiple Filings and the Automatic Stay

One of the most powerful bars to filing multiple bankruptcy petitions is the limitations of the automatic stay past the first case that is filed. In the first bankruptcy case filed the debtor will get an unlimited automatic stay stopping any and all collection activity as to all creditors. If the same debtor files another case within a year of the first case and the first case was dismissed due to not filing the required paperwork, not paying the fees on time, not showing up for the mandatory meeting of creditors and other reasons, then the automatic stay only lasts for 30 days. If the same debtor files a third case within a year of the first two cases then there is no automatic stay at all. In the second filed case the automatic stay can be extended past the 30 days if an order extending the stay is entered prior to the 30 day stay expiring. In the third case the automatic stay can be imposed by filing a motion with the bankruptcy court.

Possible Repercussions for Filing Multiple Bankruptcy Petitions – Vexatious Litigants

Section 109(g) of the Bankruptcy Code provides: (g) Notwithstanding any other provision of this section, no individual or family farmer may be a debtor under this title who has been a debtor in a case pending under this title at any time in the preceding 180 days if— (1) the case was dismissed by the court for willful failure of the debtor to abide by orders of the court, or to appear before the court in proper prosecution of the case; or (2) the debtor requested and obtained the voluntary dismissal of the case following the filing of a request for relief from the automatic stay provided by section 362 of this title.

I mostly practice bankruptcy law in the Northern District of California. We actually have a published opinion on this subject. In re Walker, No. C-98-20966-JW. In the Walker case the debtors filed ten petitions total. Their ninth bankruptcy case was dismissed with prejudice and the Bankruptcy Judge, the Honorable James R. Grube, barred the Walkers from filing another petition for 180 days and seeking a discharge of their existing debts for two years. Judge Grube also did not continue a hearing to dismiss with the case with prejudice so the Walkers could retain counsel. The Walkers appealed and lost.

In the Walkers’ case they testified that they filed three of the cases to stop the garnishment of Mrs. Walker’s wages. The rest of the cases appear to have been filed to stop the collection of utilities by the City of Santa Clara and not make pre/post-petition mortgage payments on their home. Focusing on the ninth bankruptcy petition filed, this case was dismissed for the Walkers’ failure to complete the petition schedules and they also did not appear at the 341 Meeting of the Creditors.

So what is a willful failure to abide by the bankruptcy courts order under Section 109(g)? Unfortunately the Bankruptcy Code does not define the word or term willful. Courts have interpreted “willful” to mean deliberate or intentional. In re Herrera, 194 B.R. 178, 188 (N.D. Ill 1996). To determine is willful conduct took place a court can consider repeated failure to appear or lack of diligence as willful conduct. A court can infer from multiple dismissals and re-filing of bankruptcy petitions without a change in circumstances willful failure to comply with order of the bankruptcy court. In re Nelkovski, 46 B.R. 542, 545 (N.D.Ill. 1985).

In the Walker case the debtors filed nine petitions for relief and never completed the petitions or fully prosecuted the cases. Interestingly enough, there is no absolute bar against filing nine successive bankruptcy petitions or serial filings. Tsafaroff v. Taylor, 884 F.2d 478 (9th Cir. 1989). On appeal the Court agreed with Judge Grube and affirmed the dismissal for the Walkers’ repeated willful failures to follow the Court’s orders under Section 109(g)(1).

Dismissal of the Walkers’ Case With Prejudice

Section 349 of the Bankruptcy Code provides (a) unless the court, for cause, orders otherwise, the dismissal of a case under this title does not bar the discharge, in a later case under this title, of debts that were dischargeable in the case dismissed; nor does the dismissal of a case under this title prejudice the debtor with regard to the filing of a subsequent petition under this title, except as provided in section 109(g) of this title. So there you go. A court can for cause bar a debtor from filing an additional bankruptcy for a period of time or seeking a discharge of their debts listed in the dismissed case. In re Leavitt, 209 B.R. 935 (9th Cir. 1997). In order to have cause, the debtors conduct must have been “egregious;” a finding of bad faith constitutes egregious behavior. Leavitt 209 B.R. at 939. A Bankruptcy Court may dismiss a case with prejudice in order “to punish abusive or bad faith filing.” In re Leavitt, 209 B.R. at 939.

In evaluating a debtor’s history of filings and dismissals, it is useful to consider five factors: “(1) the time between the prior case and the present one; (2) whether the second case was filed to obtain the favorable treatment afforded by the automatic stay; (3) the effort made to comply with the prior case plan; (4) the fact that Congress intended the debtor to achieve its goals in a single case; (5) any other facts the court finds relevant.” In re Hureta, 137 B.R. 356, 367 (B.R. CD Cal.1992).

In the Walker appeal the court noted that the Walkers filed case after case over a six year period with nine of the petition within a four year period and the petition subject to appeal was filed only 24 days after the previous bankruptcy petition was dismissed. On appeal the court noted that the Walkers petitions were dismissed as follows: 3 for failure to appear at the meeting of creditors or appearing at a hearing regarding the chapter 13 plan; 3 were dismissed for failure to appear the 341 meeting of creditors; 1 for failure to make the Chapter 13 Plan payments; and for failure to comply with court orders to file appropriate papers and confirm chapter 13 plans. The
Walkers were determined to have filed the ninth bankruptcy petition in bad faith and were abusing the bankruptcy process.

Vexatious Litigant Determination

A little known area of the law is the All Writs Act, 28 U.S.C. Section 1651(a). Section 1651(a) provides: The Supreme Court and all courts established by Act of Congress may issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law.

I suppose this is the like the necessary and proper clause of Article I, Section 8 of the United States Constitution or Section 105(a) of the Bankruptcy Code. They potentially can allow the entity they refer to make any law, order or holding that is deemed proper. 28 U.S.C. Section 1651(a) is no different. It has been determined that Section 1651(a) allows the district court to enjoin litigants that abuse the court system. Tripati v. Beaman, 878 F.2d 351 (10th Cir. 1989); In re Oliver, 682 F.2d 443, 445 (3rd Cir. 1982). However, the conditions cannot be so burdensome as to deny a litigant meaningful access to the courts. Tripati, 878 F.2d at 352.

So the Walkers filing nine bankruptcy petitions in four years was an abuse and the number of dismissals for failure to prosecute the cases provides evidence and supports the conclusion that the Walkers’ were abusing the bankruptcy court system. There are six factors the court identified to help determine if a debtor is a vexatious litigant:
(1) the litigant’s history of litigation and in particular whether it entailed vexatious, harassing or duplicative lawsuits;
(2) the litigant’s motive in pursuing the litigation;
(3) whether the litigant is represented by counsel;
(4) whether the litigant has caused needless expense to other parties . . . or has posed an unnecessary burden on the courts and their personnel; and
(5) whether other sanctions would be adequate to protect the courts and other parties.

The ultimate consideration is “whether the litigant who has a history of vexatious litigation is likely to continue to abuse the judicial process . . . “ See Safir v. United States Lines, Inc., et. al., 792 F.2d 19, 23 (2nd Cir. 1986). The court of appeal wasted no time in determining the Walkers were in fact vexatious litigants and their access to filing more petitions should be restricted by applying the factors listed above. The Walkers’ petitions were duplicative, failed to prosecute all nine cases, they were not represented by counsel, caused needless expense to creditors and burdened the courts. Finally the court determined if the Walkers’ access was not restricted they would continue to file bankruptcy petitions. So the court of appeals ordered the Walkers be limited as follows: (1) the Walkers have to notify the clerk of the Bankruptcy Court if they desire to file a petition and they are vexatious litigants; (2) before the Walkers can file a petition the clerk shall lodge it with the General Duty Bankruptcy Judge and be granted leave to file; (3) once the petition is accepted for filing, the Walkers must obtain leave of the Bankruptcy Court to voluntarily dismiss the petition and (4) the order will remain in effect for 10 years without further order of the court.

So, 15 petitions filed since 2009 and the debtor listed below is still going strong. An interesting part of the history below is the time between the filing of the petitions. The debtors 13th case was dismissed in 2012, then the debtor comes back and files two cases in 2014, the 14th and 15th cases. So without spending too much time the debtor listed below has intermittently fallen within Section 109(g) and arguably depending upon the facts is not a vexatious litigant given the length of time between some of the filings. The debtor also properly received the benefit of the automatic stay in a number of the cases given the timing of filing. The bottom line is this debtor has not been barred from continuing to file bankruptcy petitions and there is probably a good reason why.
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“Notice of Debtor’s Prior Filings for debtor XXXX XX Case Number 09-61041, Chapter 13 filed in California Northern Bankruptcy Court on 12/17/2009 , Dismissed for Failure to File Information on 01/06/2010; Case Number 11-58863, Chapter 13 filed in California Northern Bankruptcy Court on 09/23/2011 , Dismissed for Failure to File Information on 10/14/2011; Case Number 11-60087, Chapter 13 filed in California Northern Bankruptcy Court on 10/31/2011 , Dismissed for Other Reason on 11/16/2011; Case Number 14-54381, Chapter 13 filed in California Northern Bankruptcy Court on 10/28/2014; Case Number 09-59783, Chapter 13 filed in California Northern Bankruptcy Court on 11/09/2009 , Dismissed for Failure to File Information on 12/01/2009; Case Number 10-54170, Chapter 7 filed in California Northern Bankruptcy Court on 04/23/2010 , Dismissed for Failure to File Information on 06/08/2010; Case Number 10-59424, Chapter 13 filed in California Northern Bankruptcy Court on 09/10/2010 , Dismissed for Failure to File Information on 09/29/2010; Case Number 11-56990, Chapter 13 filed in California Northern Bankruptcy Court on 07/27/2011 , Dismissed for Failure to File Information on 08/12/2011; Case Number 10-57982, Chapter 13 filed in California Northern Bankruptcy Court on 08/02/2010 , Dismissed for Failure to File Information on 08/18/2010; Case Number 11-54700, Chapter 13 filed in California Northern Bankruptcy Court on 05/17/2011 , Dismissed for Failure to File Information on 06/02/2011; Case Number 12-50023, Chapter 13 filed in California Northern Bankruptcy Court on 01/03/2012 , Dismissed for Other Reason on 01/19/2012; Case Number 10-52271, Chapter 13 filed in California Northern Bankruptcy Court on 03/09/2010 , Dismissed for Failure to File Information on 03/24/2010; Case Number 11-55983, Chapter 13 filed in California Northern Bankruptcy Court on 06/27/2011 , Dismissed for Failure to File Information on 07/13/2011; Case Number 10-56584, Chapter 13 filed in California Northern Bankruptcy Court on 06/25/2010 , Dismissed for Failure to File Information on 07/14/2010.(Admin) (Entered: 11/26/2014)”

Should the Federal Government Sell Assets to Pay Off the National Debt?

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As of the writing of this article our national debt is approximately $17.94 trillion dollars. This number does not include debt owed by states, counties or municipalities that have issued bonds year after year to pay for local and state programs. Scared yet? The national debt owed by the federal government only is approximately $56,600 per person living in the United States assuming there are about 317 million people living in the United States. Did you know you owed that much debt? Of course not all of the 317 million people living in the United States pays taxes though, so each taxpayer owes about $65,500 when taking into account the more than 43 million Americans that do not pay any taxes; and the number is rising. The point here is to compare the United States federal government to a business or individual that carries a large amount of debt as compared to its yearly income, expenses and assets to try and answer the question, “Should the government sell assets to pay off the national debt?”

Should the Federal Government Sell Assets to Pay Off the National Debt?

Should the Federal Government Sell Assets to Pay Off the National Debt?

Is the United States in danger of defaulting on its debt?

The answer is a most decidedly no. There is always other people’s money (taxpayers) to pay taxes to increase tax revenue. Anyone who believes the United States is in danger of default is mistaken. But how much debt does our government have as compared to income? For starters we need to look at the gross domestic product (GDP) and not the gross national product. It is my opinion that the gross domestic product is more comparable to our daily life and how we earn money and spend it. Think of the GDP for the United States as your yearly income for your household. The United States Department of Commerce estimates the GDP for 2014 is about $17.40 trillion. So we as a nation have $17.94 trillion in debt and bring in $17.40 trillion in income each year. Do you believe an individual living in the United States can make monthly payments on $17,000 in debts while earning only $17,000 a year? I can tell you absolutely no. So our national debt is now as of 2014 a little over 100% of the GDP. For a comparison, according to TradingEconomics.com, in 2008 our national debt was 64% of the GDP. In comparison then, in 2008 our example person earning $17,000 a year only had about $10,800 in total debts. It still seems high, but more manageable? The main difference between our government and the person earning $17,000 a year is the government can just borrow money indefinitely as Congress raises the debt limits. An individual at some point will not be extended any more credit and if their income does not increase it is only a matter of time before they are choosing whether to eat or pay monthly debt payments. Also as our national economy grows our government should be able to continue to make the payments for the national debt. The problem is the amount of interest we pay as taxpayers is eating into the taxes that should be spent to maintain and improve our national infrastructure and services to taxpayers. The deferred maintenance that is obvious across our country is a staggering amount of money. We as a nation are seemingly just treading water. How long until we drown?

Can the federal government sell assets?

Absolutely yes. The best example that may hit home for you is when the government closed many military bases across the United States in the 1990’s. More or less any land or asset that is determined to be not needed by the government or better suited for private use can be offered for sale to private entities. You may also have read about government auctions of government assets and are considered surplus in your local paper or on the internet. There are of course laws against selling land or asets to certain organizations that may threaten national security. The unfortunate events of 9/11 have made the laws even more restrictive. It is possible to sell U.S. owned assets and there seems to be little time spent determining what public assets are suitable for private use to raise money to ease the burden on taxpayers by paying down the national debt.

How do individual and businesses evaluate and treat their assets?

As a bankruptcy attorney, I have probably been personally involved in over 2,000 bankruptcy cases as either the attorney of record, helped administer the bankruptcy case or supervised the attorney of record that filed the case. I can tell you individuals and businesses are on top of how they use their assets. Most people and businesses that file for bankruptcy protection have already liquidated their assets that have any value. That includes jewelry, household goods, supplies, inventory and even their clothing. Some are successful in paying off enough of their debts to reduce the monthly payments so that bankruptcy is no longer needed, but many unfortunately are just giving up assets that can be protected. Many of our clients before seeking the advice of a bankruptcy lawyer have taken early withdrawals from their retirement accounts to try and pay their monthly expenses without paying the penalties for the early withdrawal. At the end of the year they have a tax bill that they cannot afford to pay the government and less or no money for retirement left. Is our government doing everything possible to maximize the use of public assets to reduce the national debt and reduce the monthly payment and consequently the interest payments taxpayers have to shoulder year after year?

What is the value of our federal government’s assets?

The easy answer is a lot more than you think. According to Business.time.com and author Christopher Matthews, our federal government has over eight times our national debt in assets.
• More than 900,000 separate real assets covering more than 3 billion sq. ft.
• Mineral rights, on and offshore, covering 2.515 billion acres of land, more than the total surface land in Canada
• 45,190 underutilized buildings, the operating costs of which are $1.66 billion annually
• Oil and gas resources on and offshore worth $128 trillion, roughly eight times the national debt of the country

So let us again compare our example person making $17,000 a year with $17,000 in debts. Our example person now has about $136,000 in assets at their disposal. What a difference that makes in evaluating the financial health of our example person. By any account they are doing well financially even though their debt to income ratio is not very good. How long do you think it would take our example person to sell $17,000 worth of assets to pay off their debts and be left with $119,000 in assets and a yearly income of $17,000? I cannot think of an individual or business that would not wipe out their debts in a brushstroke if they had eight times the amount of their debts in assets.

So should the federal government sell off assets to pay off the national debt? Yes, that would be nice, but who has $17 trillion to buy the assets?

https://www.cbo.gov/publication/49450 (Budget Deficit)
http://business.time.com/2013/02/05/the-federal-governments-128-trillion-stockpile-the-answer-to-our-debt-problems/ (Federal Government Assets)
http://taxfoundation.org/article/number-americans-paying-zero-federal-income-tax-grows-434-million (Number of Americans Paying Zero Income Tax)
https://www.cia.gov/library/publications/the-world-factbook/fields/2186.html (Public debt (% of GDP)
http://www.tradingeconomics.com/united-states/government-debt-to-gdp (GDP compared to National Debt)