Florida Asset Protection Blog

Involuntary Bankruptcy Petitions By Single Creditors

Many asset protection clients are concerned about involuntary bankruptcy. Involuntary bankruptcy can deprive debtors of some asset protections which are effective in the creditor’s collection efforts in state court proceedings. For instance, homestead protection is unlimited in state court but is restricted in amount and by time in a bankruptcy court. Debtors with otherwise effective asset protection plans often ask whether a single, aggressive creditor forcing them into bankruptcy court. The general rule is that one creditor cannot force an involuntary bankruptcy in order to collect the debt.

A creditor’s petition for an Involuntary bankruptcy requires that the creditor allege and prove with evidence that the debtor is not generally paying his debts. As an example, one bankruptcy court held that, "Under Bankruptcy Code, involuntary bankruptcy petition cannot be maintained in federal court unless it can be shown that debtor is not generally paying his debts; consequently, under most circumstances, debtor's failure to pay single creditor will not justify granting of involuntary bankruptcy petition..." As long as a debtor can show that he is current on all or almost all of his other debts including credit cards, mortgages, and other obligations the debtor will probably successfully defend an involuntary bankruptcy petition of a single aggressive creditor.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

LLC Membership Interest in Bankruptcy

Limited liability companies provide asset protection benefits, not because the membership interest in an LLC is exempt from levy and collection, but because the Florida statutes limit a creditor’s collection remedies to that of a charging lien on LLC distributions, if any, to the debtor. This past week a client with a valuable membership interest in a multi-member LLC asked whether his LLC interest would be protected from a trustee in the event the debtor filed bankruptcy. The issue is whether collection restrictions imposed by Florida statutes, or other restrictions imposed on creditors by the LLC operating agreement, are binding upon a bankruptcy trustee. It seems that the answer depends on terms and conditions of the LLC operating agreement, and upon interpretation of an uncertain issue by the particular bankruptcy judge.

There is very little case law on the status of LLC membership interests in bankruptcy. The consensus is that where the LLC operating agreement is an "executory contract" the bankruptcy trustee cannot sell the debtor’s membership interest, but where the operating agreement is not executory the LLC interest is deemed to be a non-exempt property interest which is subject to the trustee’s powers over the debtor’s bankruptcy estate. Whether the LLC agreement is an executory contract depends upon whether the court finds that the agreement imposes affirmative obligations on the debtor as a consideration for receiving his rights as a member. For example, an LLC that excuses the debtor from ongoing obligations to contribute additional money, to vote in LLC affairs, or to assist with LLC business is probably not an executory contract. An operating agreement is more likely to be an executory contract protected in bankruptcy if the debtor’s rights to distributions are contingent on the debtor/member’s continuing performance or duties.

There is a good overview of this legal issue in an article published in the January, 2007, Florida Bar Journal written by Thomas Wells and Jordi Guso. ink: Bar Journal Article.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Small Details Can Sink Asset Protection Planning

Its very important to pay attention to all items on financial account applications, bank account agreements, bills of sale, vehicle titles, and all other transfer documents. For instance, one of my debtor bankruptcy clients married a man who is a commercial fisherman. The husband bought a commercial fishing vessel for all cash using money he earned from his profession and proceeds from the sale of an exempt piece of real property owned jointly with his spouse, my client. Commercial vessels have to be registered and titled by the U.S. government, and an application for new title is typically submitted by private title agencies that deal in these type of commercial boats. My client’s husband hired such a private title company which sent a form to the boats prior owner for his signature in order to initiate title transfer. The form included several boxes to be checked, each indicating a different form of joint ownership. One of the boxes was for “tenants by entireties”; another for joint ownership with survivorship; and another for community property. The standard language on the form stated that if none of the boxes were checked it any joint ownership as tenants in common would be presumed. If the boat were owned tenants in common the bankruptcy estate could claim my client’s undivided interest amounting to 50% of the fishing boat.

The seller filled out the form naming my client and her husband as joint owners with rights of survivorship, and the seller signed the form. Neither my client nor her husband signed the application for title. However, the seller did not check any of the boxes. My client claimed the fishing boat was exempt as a tenants by entireties asset because the title application listed here and her husband as joint owners. Yet, the story does not end here.

The bankruptcy trustee now argues that because no boxes were checked the boat is owned tenants in common by virtue of the standard form language even though my client did not fill out or sign the form. As a result my client has to either incur significant legal fees to contest the trustee’s objection to the tenants by entireties exemption or pay the trustee substantial amount of money to settle the disagreement. An innocent oversight in a transfer document will cost my client significant amounts of money regardless of her decision to fight or settle.

Perhaps the lesson is that in order to protect assets using Florida exemptions such as tenants by entireties debtors must pay very careful attention to all details of ownership. Laymen typically ignore small print and boxes on standard forms because they don’t appear to be significant. What may not appear meaningful to a layman can have legal significance in asset protection planning. A small legal error opens the door for creditors to challenge exemptions, and even if the creditor’s position is wrong or extreme, the debtor will at least incur legal costs to defend their exemption, and there is always a risk that a result-oriented judge will rule against the debtor. When you implement your asset protection plan make sure you have the assistance of someone with experience and knowledge.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Tenants By Entireties Under New Bankruptcy Law

The new bankruptcy law effective October 17, 2005, makes it much harder for people to move to Florida and proceed immediately to file bankruptcy. Under the new law a person has to be resident of Florida for two years to take advantage of Florida’s liberal bankruptcy exemptions. There is no waiting period for protection against civil judgments outside of bankruptcy court. There is an important exception to the two year waiting period for Florida exemption protection in bankruptcy, and that exception is the protection afforded to assets owned jointly by husband and wife as tenants by entireties when just one spouse files bankruptcy

Florida common law, established over the years by consistent court decisions, holds that property owned by spouses jointly as tenants by entireties is protected from the creditor of just one of the spouses. Tenancy by entireties is not a statutory protection from creditors; it is a common law protection that is based on how Florida courts define marital property. The two year waiting period for bankruptcy exemptions under the new bankruptcy law applies to Florida’s statutory exemptions, but the waiting period does not apply to how Florida or any other state defines property interest and the consequences of property concepts for creditor collection. Therefore, as soon as a person becomes a Florida resident his property interest are defined under Florida law. Bankruptcy law respects the property laws of individual states. Therefore, even under the new bankruptcy law, a married debtor who moves to Florida and purchases jointly owned property with his spouse should have such joint entireties property protected in bankruptcy regardless of when he files for bankruptcy protection.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Charitable Bankruptcy

Many people will be filing bankruptcy between now and October 17, and some of these debtors will go into bankruptcy knowing they have some non-exempt property which will be taken by the trustee for the benefit of their creditors. One such prospective bankruptcy filer told me last week that he had over $1,000 of liquid assets which he was prepared to surrender to his creditors in bankruptcy. The person asked me if it was permissible for him to sell his assets (in this case, stock) and donate the proceeds to the Katrina victims.

I advised the client that the donation could be seen as a fraudulent conveyance which, in theory, could be overturned or could be used to challenge his bankruptcy discharge. However, I further advised that, in practice, I do not think his donation would be challenged. A bankruptcy trustee is unlikely to sue the Red Cross to return this type of donation. Also, I suspect a bankruptcy court would find it difficult to punish a person for this type of selfless act. In general, a debtor is free to spend non-exempt money on personal consumption provided he does not purchase non-exempt assets. Florida courts have held that a debtor may gamble money rather than give it to his creditors. A donation of money that would be forfeited in bankruptcy is a creative way to apply the funds for someone else’s benefit, even if that someone is a stranger rather than a creditor.

For those rushing to file bankruptcy prior to October 17, you can consider liquidating non-exempt property and donating that property to the hurricane victims.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Which Is Better For You: Old Bankruptcy Law or New Law?

Many people are scrambling to file bankruptcy before the new law goes into effect on October 17, 2005. The New York Times, Orlando Sentinel, and other Florida newspapers have recently published articles about the increase in new filings. Yet, many new Florida residents would fare better if they waited until after October 17 and filed under the new law. The reason is that bankruptcy debtors who moved to Florida within the past two years would be treated under the exemption laws of their previous state of residence or the standard federal exemptions. Florida has a particularly generous homestead exemption, but the exemptions provided by some other states and the federal exemptions are more liberal for other types of assets. For example, the federal exemptions protect in bankruptcy $15,000 of homestead, $2,400 of vehicle equity and $1,500 tools of trade whereas Florida statutes provide only a $1,000 vehicle exemption and no exemption for tools of trade. A new Florida resident who rents or who has little homestead equity, but who has a valuable car may do better in bankruptcy after October 17, 2005.

The new bankruptcy law makes filing bankruptcy much more complicated. Anyone now considering bankruptcy should make sure they discuss all options with a bankruptcy attorney and should not assume that filing under the old law will be in their best interst.

Article on Involuntary Bankruptcy Under New Law

I read an interesting article this week on involuntary bankruptcy in the American Bankruptcy Institute Journal. Daniel Morman, a Florida attorney, writes that the new bankruptcy law creditors will be able to use involuntary bankruptcy to strip homestead protection from people who move to Florida and buy expensive homes to protect themselves from creditors. One issue addressed in the article is whether a wealthy debtor forced into bankruptcy can save his homestead if his case is converted to Chapter 13 by virtue of “the means test.” under the new law. In Chapter 13 the debtor would have to pay part of his debts over time. Mr. Morman states that the means test only applies to voluntary Chapter 7 petitions. Therefore, means testing will not stop creditors from using involuntary petitions to force a Chapter 7 liquidation of homestead properties.

I have written previously on this blog about involuntary petitions under the new bankruptcy law. There are many issues pertaining to involuntary bankruptcy which will have to clarified through judicial decisions. This article shows that bankruptcy attorneys are starting to pay attention to the importance of this issue.

Mr. Morman also raises an interesting question about the “means test” in a footnote: can debtors wanted to file Chapter 7, but who would otherwise fail the “means test”, “enlist the help of friendly creditors to file an involuntary petition on his behalf to accomplish the trick.” It would be unusual for institutional lenders to cooperate with a debtor in a typical consumer debt bankruptcy. This scenario is more likely for debtors dealing with business debt. However, a debtor whose debts are primarily business related are exempt from means testing anyway. This is, however, another interesting question raised by this article.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Involuntary Bankruptcy Under New Bankruptcy Law

Many people who have recently moved to Florida and purchased homestead properties to protect their wealth against creditors in other states are concerned that after the effective date of the new bankruptcy law creditors may force them into involuntary bankruptcy. An involuntary bankruptcy would stip away homestead protection from anyone who has moved to Florida and purchased their homestead within the prior 40 months.

At a recent national conference of bankruptcy attorneys I asked the director of the lawyer’s organization about increased risks of involuntary bankruptcy under the new bankruptcy law. Under his interpretation of the new law, the only people who could be debtors are those individuals who prior to attended a debt management course from an approved provider. Debtors who want to avoid bankruptcy would not take the approved course and they would thereby disqualify themselves from either voluntary or involuntary bankruptcy.

This past week the government issued proposed changes in the official bankruptcy rules to adapt to the new bankruptcy law. The proposed rules state that following an order approving a petition for involuntary bankruptcy the involuntary debtor had to file within 15 days a certificate of attendance at a debt management course. The rules contemplate that a person can be ordered by the bankruptcy court to get debt management education after, not before, he is adjudicated bankruptcy as a result of an involuntary petition. Whereas a voluntary bankruptcy debtor who does not file a certificate of attendance is subject to dismissal of his case, the rules do not specify penalties for failure to attend debt management as a result of an involuntary petition.

We do not know if courts will find that the debt management education requirement of the new law is an obstacle to involuntary petitions. It appears that proposed bankruptcy rules assume that mandatory debt management education is not inconsistent with involuntary bankruptcy.

posted by Jonathan Alper, asset protection and bankruptcy lawyer, Orlando, Florida

How To Annoy Debt Collectors

Many people facing bankruptcy are tormented by collection agencies. There are legal ways to fight back using federal consumer protection statutes. For example, the Fair Debt Collection Practices Act provides that if you receive a collection notice and thereafter send a letter requesting verification of the debt, the creditor cannot take legal action until it provides written verification. If you ask for information about the debt, such as the payment history and amortization schedule where applicable, this information as to be provided before the creditor can proceed with a lawsuit. The creditor’s failure to respond to your dispute and request for verification can be used in court to defend or delay collection suits. If you receive information from the creditor you may write back stating the information is insufficient or unclear and demand more information.

There is not special language needed to dispute a debt or request verification. A debtor could simple write that, “I dispute this debt”, or “please send verification of the debt”, or “I’m not going to pay this debt and you can’t make me.” Requests for information about a debt or debt disputes is an easy way to delay collection lawsuits without hiring an attorney, and you get the satisfaction that you are annoying your creditors.

posted by Jonathan Alper, asset protection and bankruptcy lawyer, Orlando, Florida

Involuntary Bankruptcy May Be Impossible Under New Bankruptcy Law

Previous Blog posts have discussed fears that once the Bankruptcy Reform Act is in effect on October 17, 2005, more and more creditors will try to force people into involuntary bankruptcy in order to strip debtors of exemptions otherwise available under Florida law. For example, many debtors with expensive homes who enjoyed unlimited homestead protection in state court would forfeit homestead protection above $125,000 if they were forced into bankruptcy court by a creditor who filed in an involuntary petition. One creditor with an undisputed and liquidated claim for $12,000 can file a petition for involuntary bankruptcy. However, upon further review, fears of involuntary bankruptcy epidemic under the new bankruptcy law may be exaggerated, and in fact, the new law may make it even more difficult for creditors to impose bankruptcy upon individuals.

Section 109 of the Bankruptcy Code describes who may be a debtor. The new subsection 109(h)(1) states that an individual may be a debtor only if the individual first complete a “briefing” from a nonprofit budget and credit counseling agency. There is no provision of the new law which gives a creditor, a trustee, or a court the right to compel an individual to get a credit briefing. It seems logical that an individual who has not had his credit briefing can not voluntarily or involuntarily be a debtor under the Bankruptcy Code. This credit briefing requirement may make involuntary petitions against individuals moot, and a creditor who files an involuntary petition against a debtor who has not submitted to a credit briefing would seem to be in “bad faith” and would subject the creditor to sanctions.

posted by Jonthan Alper, asset protection and bankruptcy lawyer, Orlando, Florida