Extra Credit Problem
Danny Daniels married Deborah in 1995. Deborah brought into the marriage a piece of real property located in Yolo County which Danny and Deborah currently rent out. The house is valued at $150,000. They have a first trust deed on the property with Countrywide Home Loans for $145,000.00 and a second loan they recently took out to pay debts of $20,000.00 with Hard Times Loans. Hard Times Loans commenced foreclosure proceedings. The rental proceeds of $700.00 per month are deposited into their joint account.
Danny had no assets at the time they were married, but did have a good job. Danny quit his job at $ 60,000.00 per year, in January 2007 to open an art studio and woodworking shop. He has been losing money ever since. He has tools for woodworking, painting and sculpting, and repairs, and a computer.
In an attempt to build his business, he had only been taking home $30,000 per year until three months ago when he stopped taking anything. He has debt to suppliers of $ 10,000, but the inventory is not worth much more than that figure, one quarter of that being delivered within the last month. He has withheld payroll taxes for his employees to the state and Federal government, but has not made his quarterly payments for three quarters so he owes $5,000 to the state of California (FTB) and $5,000 to IRS. The Daniels have filed all tax returns on time.
Danny has an 8 year lease with 5 1/2 years remaining at a good rate for that studio location with rent at $700 per month. He believes it is suitable for many types of businesses on a busy street. 2
In 2000 the Daniels bought a house for $250,000 located at 500 N. Mariposa Avenue in Los Angeles, CA 90045. Deborah is working as a secretary at a law firm earning $40,000 per year. Danny still owes monthly payments of $250 to his ex-wife, and Deborah receives child support for one of the children at their home of $200 per month. They have a child, Andrew, who is 4 years old.
They furnished the house three years ago with furnishing that cost them $10,000. Danny keeps a gun collection worth approximately $10,000. The other assets consist of $4000 in a company-sponsored pension plan at Deb’s company, and $2000 in Danny’s IRA. Danny estimates that the cost of his clothing is $4000 and Deb estimates the cost of hers at $5000. They have two cars, each of which they use for their transportation to and from work. Danny’s car is a Ford worth about $7,000, but he still owes $5000 on it. Deb has an old 1967 Mustang worth maybe $2,000.
Deborah is in the middle of a lawsuit against her ex-employer for wrongful termination. She is claiming $100,000 in that lawsuit. She is represented by Charles Cummings.
Danny has a $100,000 term life insurance policy. Deb has no insurance. Danny owns a hundred shares in IBC Incorporated, which is publicly traded on the New York Stock Exchange. He estimates those shares to be worth $4000, but has a margin account at his broker, Charles Schwab & Company, which he pledged for a loan of $2000.
Deb has a wedding ring worth $2,500. They have a small savings account with $1,250, and $275 in their joint checking account. Deb has a separate account with $1,300, which she just moved to a credit union. Danny previously filed a bankruptcy in 1994. Knowing they were going to file bankruptcy, Danny prepaid three months on his mortgage.
Danny and Deb owe the following people money: Danny owes $4,500 on his Visa card for purchases made over the last three years. Part of the balance is for a $500 cash withdrawal that he made 60 days ago and for part payment of a recent trip to Hawaii in the amount of $1,500. Danny owes the following store charges: Macy’s $300, Comp USA $450, J.C. Penny $175. Deb has been a fairly free spender and owes $6,500 on her Master Card, $4,500 on her Visa, $1,300 on her Discover card.
She is also a cross-defendant in the lawsuit she brought against her ex-employer. Her ex-employer is claiming $75,000 against her, alleging that she misappropriated money while she was employed. They are represented by the Dewey firm. Part of the furniture in their house was bought from Sears, to whom they still owe $1,800, and they entered into a regular merchandise agreement with Sears in connection with their purchase.
They have a first trust deed on their residence from Your Loan Company in the amount of $125,000 and a second trust deed from another lender, E-Z Loans, for $50,000 In addition to other amounts specified above, their monthly bills are as follows:
1. Residence:
First mortgage - $1,250;
Second mortgage - $500;
2. Rental home:
First mortgage - $750;
Second mortgage - $100;
3. Food - $600
4. Utilities - $150
5. Transportation including gasoline - $500
6. Car payments - $300
7. Clothes - $200
8. Medical insurance - $300
9. Entertainment - $250
10. Credit Cards - $400
11. Child care - $450
12. Telephone - $ 50
13. Laundry - $ 35
They have regularly been making $400 payments on their credit cards for the last six months. They also recently gave a $1,000 gift to Danny’s Mother for her 60th birthday. Within the last three months, they had a refrigerator repossessed. They recently changed their bank accounts to Reddy Bank to avoid possible attachments. Their prior bank was Bank of America, where they have two of the credit cards.
Danny had a job paying $ 60,000.00 per year before he left to start his own business. He has been applying in the field for replacement work. He has placed an ad to relet his store space. They have just taken a credit counseling class and have cut up their credit cards, not to use them again.
With their financial problems increasing, they have decided to file bankruptcy. Danny prefers Chapter 7 and Deborah prefers a Chapter 13.
Suggested Answer: (provide code sections for exemptions, and explanation of 527(a)(2), (b), and (c)
Under the new Code, pre-bk planning is crucial and nuanced and determining the precise point in time to file a petition is paramount.
1.) When first meeting, did the paralegal give the notices mandated by 527(a)(2), (b), and (c), and 342(b)? Notices must be given;
2.) Did the Debtors take the pre-bk certification course before filing bk. If not, bk petition is automatically dismissed.
3.) $1,500.00 is far to low for attorneys fees. An appropriate charge for this bankruptcy is $3,500.00, plus the $299.00 filing fee.
4.) The type of chapter that should be filed and, more importantly when, hinges on the B22 analysis, which must be performed first.
5.) The median family income for a family of 4, presuming there are four people living as a family unit, is $77,014.00.
6.) The combined total income is presently $40,000.00, Deborah's income, but the B22 looks back 6 months, and they have rental income of $8,400.00, which may put them over the B22 limit temporarily. So may need to wait
until they fall below the median family income to file, and presuming their expenses are higher than their income.
7.) Chapter 7 is dependent on the value of the primary residence. Presuming their home is underwater, they can keep the primary residence and the rental. The rental is underwater according to the facts. The Trustee is
not going to touch it.
8.) The 704.720 can be used to exempt up to $75,000.00. Presuming the Debtors do not have substantial excess equity in their home, they should file chapter 7 at the appropriate moment.
9.) All retirement plans are exempt under 704.115 and 522(n), which now allows exemptions up to $1,000,000.00 in retirement assets.
10.) The tax liabilities will pass through bankruptcy so this needs to be taken care of. The tax liability can be paid and the Chapter 7 Trustee will not say anything if it is paid. Since Danny is getting out of the business
he has tools of the trade and inventory. He also has $10,000.00 worth of guns. These categories can be exempted up to $6,750.00 each; however, Danny is getting out of the business so the Trustee might question the tools of the trade exemption. If the inventory and tools of trade, and part of the gun collection, and inventory can be liquidated in short order it would be appropriate to do so for four reasons. (1) value of the foregoing items exceeds the exemptions on all counts; (2) Danny is getting out of the business anyway so these items are no longer needed; (3) past due taxes are the gift that keeps on giving, the proceeds from these liquidations can be used to pay the IRS and FTB debts and if there is excess money it can be used to bring the mortgages on the rental current; (4) The wife's wedding ring is not going to be taken regardless, unless its really expensive, but still nice to have the room under 704.040 to exempt it. The Debtors are probably going to have a few months to wait anyways to bring their median income down so it is a good idea to wait.
11.) The furnishing are exempt so long as they are of the type that would normally be in the Debtor's home.
12.) The credit card debt is dischargeable so long as their were no charges out of the ordinary, ie., a shopping spree or junket to Vegas. Looks like that may have been the case with the Hawaiian junket. Was the $500.00 used for ordinary living expenses? If so this will pass muster. The Hawaiian trip is a reason to put off filing for few months to lessen the chance of a 527 complaint.
Note, that the attorney can be held liable for negligence (what code section or case applies here?) if
a creditor is not identified in the Schedule F. The way to insulate against this is to download the three credit reports into the schedules with all of the addresses. The paralegal must also check to obtain all correspondences with creditors within the (why 90 days and what code section) 90 days preceding bankruptcy to see if the debts have been sold or transferred to collection agencies and to add them in as well. GET ALL OF THE CREDITORS THIS IS CRUCIAL IN EVERY INSTANCE.
13.) They should stop paying on their credit cards, presuming their income qualifies under B22 or will qualify and use the money to pay living expenses, taxes, to bring the 2nd current, etc.
14.) The following types of motions and matters might be filed: motion for relief from stay to proceed to foreclosure on the rental, objection to discharge under 523 and 727. May be able to file a motion to avoid the 2nd on the rental in a 13.
15.) The gift to Danny's mother of $1,000.00 has to be listed in the Statement of Financial Affairs and maybe avoidable by the Trustee, but not likely given the amount it will fly below the radar, unless this was money
withdrawn from the credit card and given to the mother as a "gift". Where did this $1,000.00 come from?
16.) You now have to reaffirm or redeem debt secured by personal property. There is also a box to check to "keep and pay". Check this box all of the time, although it is not an option. Most creditors will go along with it
and your client gets to keep their car and if anything goes side ways they can simple return the car. Here, Sears has a secured interest in the furniture. Under your scenario, they will ask for a reaffirmation agreement. The attorney should recommend against this, but will be required in certain circumstances for example, the obligation on the family automobile will have to be reaffirmed if the lender insists. Toyota is nasty about this. I recommend that clients wait until after they file bk to decide whether to reaffirm so that they can see whether their finances post-bk will hold up or continue to deteriorate. When the Debtor files bankruptcy, the secured creditor must be sent notice of Debtor's intentions with respect to secured property. (what code section, and form)
17.) The Debtor may be entitled to claim an exemption for certain parts of the wrongful termination lawsuit like emotional distress damages. The bankruptcy estate maybe entitled to other parts of the lawsuit. The lawsuit
must be reviewed closely and listed in the Debtor's schedules as an asset. Concurrently, the cross-complaint for stolen monies must also be reviewed closely and listed as disputed in the schedules.
18.) The cars may be entirely exempt under 704.010, but the paralegal should closely determine how the Debtors determine value and get evidence of these valuations as well as the value of the homes.
19.) Get a copy of the insurance policy and review to see if it has any liquidation value. It does not matter what the client says. They do not get insurance and half the time they are wrong about the types of policy they have.
David these are some of my thoughts. Let me know if you need anything else. Brett
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