A debtor who becomes entitled to an inheritance in the six months following the filing of a bankruptcy case must contribute that inheritance to his creditors. 11 USC 541 (a)(5). This is one of only three exceptions to the idea that bankruptcy operates to “net out” what the debtor owns and what he owes on the day the case is filed.

As Craig Andresen points out, the contents of a spend thrift trust are not property of the bankruptcy estate, and not, therefore, available to pay creditors in a bankruptcy case. So, if that inheritance comes to the debtor in trust rather than outright, it does not go to creditors.
As awkward as it is, I try to ask prospective debtors if there is any likelihood that they will inherit money in the near future. If that is a possibility, I suggest that the client talk frankly with the source of that inheritance about making any gift to my client in trust, with a spendthrift clause.

While most Americans are incredibly private about their financial troubles, I doubt that anyone leaving money to their loved ones at their passing wants that money to end up benefiting the credit card lenders. It may require that the client swallow their pride to admit to the depths of their financial woes in the process of enlisting the help of the testator to make their gift effective. It requires consideration.

The “new” bankruptcy law set out to make bankruptcy complex and laden with booby traps, including the restrictions on choice of exemptions. John Bates has performed a truly marvelous service with his table of exemption systems available in each state and the options for those who have moved within the statutory periods.

ExemptionsExpress collects all of this highly technical information and is a god send for attorneys in one state who have to figure out whether the exemptions of another state are extraterritorial.

Now, if I could just find a reliable, up to date collection of the exemption amounts in each state, I’d be a happy camper.

My colleague Nick Ortiz explained cash collateral as primarily a business bankruptcy concept: a creditor with a lien on income producing assets has a lien on the cash that asset produces as well. But you don’t have to have a traditional business to have cash collateral, and the duties it brings in a bankruptcy reorganization.

The issue usually comes up with respect to rental real estate: the monthly rent is cash collateral. In consumer cases, it is often the taxing authorities who have a blanket lien on all of the debtor’s assets. The other, obvious but oft forgotten lien holder is the mortgage lender, whose security documents undoubtedly give it a lien on the income produced by the mortgaged property.

In any bankruptcy case in which the debtor remains in possession of his assets under the protection and supervision of the bankruptcy court, the rights of the secured lender in the cash collateral must be respected. The debtor is prohibited from using cash collateral without either the consent of the secured creditor or a court order. Fail to get either consent or an order and appointment of a trustee, conversion or relief from stay are likely to follow.

An article on the Network Bankruptcy Law on exemptions touched obliquely on a point not widely discussed: debtors get to keep assets where the sale value of the asset equals the exempt amount PLUS the costs of administering the asset. A basic principle guiding what a Chapter 7 trustee does is that he only administer assets of the debtor where his sale of the assets results in a meaningful dividend to creditors.

Where I practice, trustees are not interested in opening a case where the gross funds in the estate is several hundred, or even several thousand dollars. By the time the trustee pays his commission, an accountant to prepare a tax return and examine claims, that sum of money won’t pay a meaningful dividend to creditors. In those situations, most trustees will abandon the non exempt value in assets.

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What often brings a prospective bankruptcy client to my office is the filing of a collection suit by a creditor. Almost invariably, the client has leapt to two incorrect assumptions: one is that the world as they know it is coming to an end; and two, they don’t have to do anything until the date set for the case management conference, months down the road.

On the issue of the implications of a lawsuit, it is a step toward a judgment in favor of the creditor. A judgment is a determination that the debtor owes the amount of the debt and usually the creditor’s expenses to get the judgment. A judgment entitles the judgment creditor to enlist the coercive power of the state to collect that judgment by levy, lien or garnishment.

A judgment in California does not automatically constitute a lien on the debtor’s assets, as it does in Georgia where my colleague Jonathan Ginsberg practices. Jonathan writes that a judgment creditor is automatically a secured creditor.

In California a creditor with a judgment must take an additional step to create a judgment lien. A judgment lien on real estate is created when an abstract of judgment, issued by the court after entry of judgment, is recorded in the records of the county recorder. A judgment lien on personal property is created by filing a notice of judgment with the Secretary of State.

A judgment lien allows a creditor to execute on that lien through the courts. In that process, even outside of bankruptcy, the judgment debtor may claim an exemption in certain kinds of property. The California state exemptions are set out in Bankruptcy in Brief.

In short, getting a judgment is just a step toward actually taking something from the judgment debtor. All these steps take time and cost the creditor something. The filing of a suit may be a good indicator that the client needs to do something proactive about their financial situation but it is not an emergency.

More about the second erroneous assumption tomorrow.

Car manufacturers lobbied Congress to make it harder for debtors to keep their cars through bankruptcy. In Chapter 7, that was accomplished by eliminating the “ipso facto” clause, which said that merely filing bankruptcy was not a breach of the purchase contract. The expectation was that debtors would reaffirm their car loans, giving the car lender the right to sue for a deficiency judgment against the debtor should the debtor later default, rather than risk losing the car.

Reaffirmations would diminish the debtor’s discharge and lock the debtor into paying for a car that might well be worth substantially less than the loan balance.

Debtor’s attorneys were expected to certify that repaying a car loan would not create a hardship for the debtor; if the attorney wouldn’t/couldn’t so certify, the reaffirmation agreement needed to be approved by the bankruptcy judge after a hearing. Most bankruptcy judges were less than enthusiastic about this new role.

Debtor’s lawyers have wondered about the continued existence of “pay and drive”, the practice of car lenders allowing the debtor to keep the car for so long as the payments were current and the car insured. Putting debtors to the test of reaffirming a badly upside down car or returning it to the lender might not be such a great idea for the auto industry if debtors shucked their greatly depreciated vehicles.

At last weekend’s banrkuptcy seminar, judges and lawyers reported that in practice, only Ford Motor company is routinely repoing vehicles where the post bankruptcy debtor has not reafffirmed the debt but remains current on payments and has insurance. All the rest of the lender community has apparently figured out that they do not want to “eat steel” and take possession of a flood of cars worth less than what is owed from debtors willing to continue paying for them.

Perhaps, a bit of common sense has inserted itself in the world of BAPCPA.

Cathy

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