Los Angeles Bankruptcy Law Monitor : Los Angeles Bankruptcy Lawyer & Attorney : Christine Wilton Law Firm : Southern California Chapter 13 & Chapter 7 Bankruptcy, Foreclosure

In determining eligibility to file for a chapter 7 bankruptcy, the basic qualifying factor is income under the Means Test as set forth in 11 U.S.C. 707(b)(2).  The debtor's income must fall below the Census Bureau's Median Income by Family Size.   Thus, the Means Test is a two prong test:

• The first prong being the size of the household; and

• The second prong being that of the debtor's gross income for the six months preceding the bankruptcy filing. 

Debts generally not dis chargeable in Chapter 7 bankruptcy include:  taxes, child or family support payments, student loans [absent undue hardship], traffic tickets, government fines, alcohol related accident judgments, judgment for willful or malicious conduct resulting in serious physical injury or death.

Debtors are required to submit a copy of their recent tax transcripts to the Trustee prior to the meeting of creditors, 11. U.S.C. 341(a).  A copy of the tax transcripts can be obtained by the debtor by calling the IRS 1-800-829-1040 and the debtor can even authorize the transcripts be faxed directly to counsel.  The IRS attorney line for transcripts is 1-866-860-4259. 

In California, their are certain exemptions that can be taken under California Code of Civil Procedure Sections 703, 704.  Exemptions allow a person to keep certain assets after the bankruptcy.  You must select only one set of exemptions.  If spouses are filing jointly, they must select the same set of exemptions.

A qualified bankruptcy attorney will review your individual financial situation and determine whether you qualify for chapter 7 or need to file chapter 13 bankruptcy.   

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New median income figures take effect November 1, 2009.  The change in median income levels will have a direct impact on those seeking debt relief through chapter 7 bankruptcy because of the means test.  Individuals seeking to file chapter 7 bankruptcy must pass the means test   in order to qualify; otherwise they will be required to file under chapter 13 and make some payments toward their debt.  Not since the inception of Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") in 2005 have we seen the income figures drop.  What this means is that those seeking debt relief under Chapter 7 bankruptcy, may soon be disqualified and forced to file under Chapter 13 instead.

Here in California, our current unemployment rate is 12.2%, according to the Bureau of Labor Statistics.  Our real estate market still has not bottomed out as those in the industry project a Gloomy Outlook.  Lenders have been stalling out or flat out refusing to modify mortgages that would otherwise qualify under the Obama Plan and more foreclosures are coming soon.  Also, our state workers have taken approximately 3 furlough workdays without pay, which equals an approximate 14% pay cut.  No wonder the median income figures are dropping. 

It's time to review those borderline Chapter 7 cases pending and get them filed before the client potentially becomes disqualified under the new changes taking effect November 1st. I don't think it's Bankruptcy Means Test Irony as the folks over at Bankruptcy Law Network do; it's the factual truth.

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Would you advise your client to file a Strategic Bankruptcy?  I read Michael Doan's recent blog article about the subject and would like to add there are tax advantages to home ownership that were not considered in the equation.  A homeowner receives the tax advantage of writing off the mortgage interest paid on their loans and property tax payments, while renters receive no such tax advantage.  When a homeowner stops paying on their mortgage, they no longer receive these tax advantages. The tax advantage would serve to reduce the overall savings by the amount in reduction of income tax, even if nominal, it still must be a consideration.

Further, the insurance requirements of home ownership can be expensive, depending upon the home.  However, the usual homeowner policy also covers the owners personal property both on premises and off, and personal liability.  A renters policy serves a similar puprose and will cost sometimes less or about the same as a homeowners policy.  I would never suggest that an owner stop paying on the insurance policy while they are still legally on title and responsible for the property, especially in our fire ridden state of California.  If there is a loss on the property, while the owner is still on title, and no insurance in force, then the owner would be  personally liable. 

Here's an idea:  A Shortsale with a lease back option is something I've personally considered for my own home.  As an example, my home is currently upside down by approximately $209,000.  I could eliminate that debt by having a family member buy my home for fair market value in a short sale and then I could rent it from them.  That way, I eliminate the debt and later, I buy back the house from them without the additional burden.

In conclusion, make sure you get all the facts and numbers on the table.  Each situation is more unique and we cannot possibly say that anyone with negative equity should strategically foreclose or file bankruptcy.  An attorney will discuss all your options and then you decide your best course of action. 

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The use of bankruptcy as a strategic move in litigation requires a fine line approach.  Susan S. Davis and Alicia N. Vaz wrote, The Impact of Adversary Filing for Bankruptcy during Civil Litigation , Los Angeles Lawyer (Sept., 2009), from a litigation strategy perspective.

As a debtor strategy, the first inclination in seeking bankruptcy protection is to invoke 11 U.S.C. §362(a), known as the “automatic stay.” The automatic stay operates to stop actions or proceedings against the debtor, the moment the bankruptcy petition is filed with the bankruptcy court.

Before continuing any action against the debtor, a party in a pending litigation must obtain relief from the automatic stay. Within the Central District of California, the party seeking relief from the automatic stay would file a Notice of Motion and Motion for Relief From the Automatic Stay under 11 U.S.C. § 362. You can find the forms here. The likelihood of prevailing on a motion for relief is highly dependent upon the type of bankruptcy action filed by the debtor, whether the bankruptcy court is the proper venue for the action and whether any insurance coverage will be afforded to the judgment.

Other considerations include timing, injunctions, removal, forum, varied jury pools and procedural concerns. Keep in mind that the bankruptcy court is a court of special jurisdiction and simply, is not equipped to handle the more complex and varied cases. Much like the law of insurance, if it should be covered elsewhere, then that is where it belongs.

From a debtor standpoint, be wary of using bankruptcy as a strategy in any civil litigation case because you must file bankruptcy in good faith and the other party will most likely be granted relief from the automatic stay where it would be appropriate for the court to do so. 

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