Case Law News from NACBA and their important work through Amicus Briefs in Consumer Bankruptcy Cases

Amicus Project Update

November, 2013

Inherited IRA's to be decided:

Cert. Granted

The Supreme Court has granted certiorari in the case of Clark v. Rameker (In re Clark), No. 13-299. In that case, the Seventh Circuit created a split in the circuits when it held that a debtor may not exempt her inherited IRA in bankruptcy. In re Clark, No. 12-1241 & 12-1255 (April 23, 2013). The Fifth Circuit had reached the opposite conclusion in Chilton v. Moser, 674 F.3d 486 (5th Cir. 2012). NCBRC will file an amicus brief on behalf of the NACBA membership in this important case.

Fees upon frivolous appeal sought:

Debtor Moves for Fees on Frivolous Appeal. The debtor in In re Murray, No. 13-34 (B.A.P. 10th Cir.), has moved for fees and costs against the trustee for filing a frivolous appeal. The case involves the question of the constitutionality of Kansas’s bankruptcy specific exemption—an issue upon which the trustee has consistently lost in the bankruptcy court, In re Westby, 473 B.R. 392 (Bankr. D. Kan. 2012), the district court, In re Lea, 2013 W.L. 4431267 (D. Kan. 2013), and the BAP, In re Westby, 486 B.R. 509 (B.A.P. 10th Cir. 2013).Although the trustee filed an appeal of the Westby case to the Tenth Circuit, she later dismissed it, Williamson v. Westby (In re Westby), Case No. 13-3044 (10th Cir. 3/29/13), and, instead, sought another bite at the apple in the BAP with Murray. The trustee’s likelihood of success at the circuit level was further diminished when the Sixth Circuit upheld the constitutionality of state bankruptcy specific exemptions in In Re Schafer, 689 F.3d 601 (6th Cir. 2012), cert. den. sub nom. Richardson v. Schafer, 133 S. Ct. 1244 (2013). In the meantime, as a result of the trustee’s decision to pick away at individual cases in the lower courts rather than seek decisive resolution in the Circuit Court, some debtors have been forced, for financial reasons, to settle the issue at the outset thereby losing the benefit of the exemption. NCBRC was involved in Schafer and has been involved in a number of the cases coming out of the Kansas court on this issue, filing amicus briefs and assisting with debtor’s briefs.

Carving out an equity exception to the debtor's fully encumbered homestead:

Fourth Circuit Allows Trustee/IRS Carve-Out Agreement In an unpublished, per curiam, opinion the Fourth Circuit found that the trustee could sell the debtors’ fully encumbered homestead despite the fact that the debtors were entitled to an exemption for the property. In re Reeves, No. 12-2127 (Nov. 20, 2013). The debtors’ residence was fully encumbered by a first mortgage lien and a tax lien. Under North Carolina law, the debtors claimed an exemption in their homestead in the amount of $60,000.00. The trustee objected to the exemption on the basis that the debtors had no equity in the property. After the bankruptcy court overruled the objection, the trustee moved to sell the property explaining that the IRS had agreed to “carve out” a portion of its share of the proceeds to benefit the bankruptcy estate. The debtors objected to the sale arguing that allowance of the exemption effectively removed the property from the estate. The bankruptcy court disagreed finding that the exemption was as to the debtors’ “interest” in the property rather than in the property itself. The district court affirmed. On appeal, the Fourth Circuit relied on Schwab v. Reilly, 130 S. Ct. 2652, 2661-63 (2010) for the distinction between an “asset” and the “interest” in that asset, finding that the exemption applied only to the latter and did not result in removal of the entire asset from the bankruptcy estate. The court went on to reject the debtors’ argument, which was more fully elucidated in NACBA’s amicus brief, that where an asset is fully encumbered the trustee must abandon it and a side agreement with a creditor to circumvent that rule is not a legitimate exercise of the trustee’s power. In a short discussion notable for its lack of in-depth analysis, the court found simply that the agreement between the IRS and the trustee “assigned equity” to the asset for the benefit of the estate. As an unpublished opinion this decision is not precedential.

Extent of Lien Avoidance Posers:

Argued: In re Traverse, No. 13-9002 (1st Cir.) Issue: Whether upon avoidance of a lien the trustee gains the debtor’s power to sell the property for which the debtor has claimed a homestead exemption, or whether the trustee’s powers are limited to what the lienholder could have done. Argument date: October 10, 2013. NCBRC filed an amicus brief on behalf of the NACBA membership.

Surcharging Homestead Exemption:

Set for Argument:

Law v. Seigel, No. 12-5196 (U.S.S.Ct.) Issue: Whether the debtor’s homestead exemption may be surcharged as a result of the debtor’s failure to comply with discovery. Argument date: January 13, 2014. NCBRC filed an amicus brief on behalf of the NACBA membership.

NACBA advises that the Supreme Court will decide if the debtor's homestead exemption can by surcharged with costs incurred by the Ch. 7 trustee due to debtor's alleged misconduct, to resolve a split among the Circuits.

NACBA Defends Debtor's Homestead Exemption in U.S. Supreme Court

The NACBA membership filed an amicus brief in the case of Law v. Seigel (In re Law), No. 12-5196 (Sept 3, 2013), in defense of the debtor’s homestead exemption. In that case, the lower court, ostensibly pursuant to its power under section 105(a), imposed the surcharge to pay trustee fees resulting from litigation necessitated by debtor misconduct. See Law v. Siegel (In re Law), 435 Fed. Appx. 697, 2011 WL 2181198 (9th Cir. 2011).

The brief argues that while section 105(a) grants equitable power to the court to effectuate the terms of the Bankruptcy Code, it does not permit the court to contravene other sections of the Code or bypass its otherwise applicable provisions. In sections 522(c) and (k) Congress specified that exempt property cannot be used to pay pre-petition debts or administrative expenses. In addition, in sections 522(o) and (q), Congress specified conditions under which a homestead exemption may be compromised as a result of debtor’s misconduct. Section 105(a) permits a court to use its equitable power to “carry out the provisions” of the Code, not to override or contradict them. The brief points out that the court has other methods of sanctioning debtor misconduct. Section 727 contemplates denial or revocation of discharge of specific debts in the face of misconduct. Rule 9011 permits imposition of traditional litigation sanctions against a wayward debtor.

In the alternative, the brief seeks to minimize the damage of a potentially unfavorable decision by asking the Court to allow such equitable action by a lower court only under unusual circumstances where: “(1) the debtor has engaged in misconduct that actually injured one or more creditors by depriving them of estate assets to which they were entitled; (2) the misconduct involved an intentional effort to conceal or dissipate estate assets so as to keep them from creditors; (3) the surcharge is no greater than necessary to remedy the harm to creditors caused by the misconduct (i.e., is remedial rather than punitive); and (4) no other available remedy is adequate.”

The Supreme Court’s decision can be expected to resolve the split between the first and ninth circuits, see Malley v. Agin, 693 F.3d 28, 30 (1st Cir. 2012); Latman v. Burdette, 366 F.3d 774, 785 & n.8 (9th Cir. 2004) (permitting surcharge), and the tenth circuit, see In Re Scrivner, 535 F.3d 1258 (10th Cir.2008) (not permitting surcharge).

The National Consumer Bankruptcy Rights Center has been active in cases around the country – Read about these cases by clicking on the links below:

Petition for Cert. Filed in Inherited IRA Case

Reeves (4th) and Traverse (1st) -- Moving Forward

Please consider making a contribution to the National Consumer Bankruptcy Rights Center to advance this important work.

Can I keep my house if I file for bankruptcy?

What you can keep in a bankruptcy case depends on what Chapter you file and where you live.

In many, many instances, bankruptcy allows you to keep your house and is the only tool to allow you to keep your house.

CHAPTER 7
Normally, in a Chapter 7 case, you can keep whatever you can exempt under the allowed "exemptions". 
An "exemption"  is something that you may keep, regardless as to how much money you owe to creditors. 
There is a State Exemption scheme in many states and there is a Federal Bankruptcy Code exemption scheme applicable to all states. 

If you live in New Hampshire, where I practice, you can choose either (1) the State Exemptions or the (2) Federal Exemptions.  If you go to my prior articles, click on "exemptions", and it will tell you what you can exempt under the Federal or State Exemption schemes.

Under the New Hampshire State Exemptions, you have a homestead exemption of $100,000.  Under the Federal Bankruptcy Code exemptions, you can exempt $21,625 in value of your home.

So, if you own a home worth $250,000 and owe $150,000 on the mortgage, you have an equity cushion of $100,000.  Under the New Hampshire State Exemptions, you could protect all of the equity in your home (remember, there is a $100,000 homestead exemption) and go through Chapter 7 without the bankruptcy trustee touching your home.  You can keep it.  The only issue is then between you and the mortgage holder on your home.  If you are current in your mortgage payments, then regardless as to whether you file Chapter 7, the mortgage holder cannot foreclose on your home as long as you are current in all of your obligations under the mortgage. Many people who are overwhelmed by credit card debt or medical bills, stay current on their home mortgage payments, and file Chapter 7 to get rid of the credit card debt and medical bills - and still keep their home. 

If you are not current on your mortgage payments, then the lender may foreclose - but you still get to keep the surplus proceeds over and above what you owe on the mortgage on any foreclosure sale of your home.

CHAPTER 13.
In Chapter 13, you would still choose either the State or Federal Exemption scheme. However, as long as you make the Chapter 13 payments under your Chapter 13 re-payment plan, you can normally keep ALL of your assets. 

The reason you list the exemptions in Chapter 13 is to figure out how much equity you have in your assets after application of exemptions.  Why? Because, in Chapter 13, under your repayment plan you should pay your unsecured creditors (nomrally credit card debt or medical bills) the same percentage they would receive if you liquidated all of your assets after application of the exemptions - essentially, pennies on the dollar spread over the life of your Chapter 13 re-payment plan.

Many people file Chapter 13 because they are behind in their mortgage payments and just cannot catch up, but they want to keep their home.   Chapter 13 gives the home owner the opportunity to keep their house. 

Let's say Mrs. X pays $1000 monthly to her bank for her mortgage but she was out of work for a few months and fell behind 4 payments - she now owes the bank $4000 in past-due payments, called "mortgage arrearages".  She tries to get a loan modification, but the bank just will not work with her.  Mrs. X tells the bank she can still make her $1000 monthly mortgage  payment if they would just let her spread out the $4000 she owes in mortgage arrearages over time.  Mrs. X says to the bank, if you just let me spread the $4000 I owe in back payments over 36-months, I can catch up.  The bank says "no". They tell her they are going to foreclose on her house.

[When a bank says the "f" word ("foreclosure") - take action.  Please click on the articles under "foreclosure" on my blog to learn more about foreclosure - because in New Hampshire, the bank normally does not have to take you to court to foreclose on your home and you can be on the street in a matter of months.]

Mrs. X can force the bank to take her deal by simply filing Chapter 13 and sucessfully completing  the same 36-month re-payment plan!