Posts Tagged ‘debtor’

In bankruptcy it is not uncommon for a debtor to own real property (a house or land) jointly with another person who is not filing. An example of this would be if you own your home with your spouse and your spouse is not filing bankruptcy. While this does not present a major problem for most debtors, there are situations where joint ownership could present a problem. In this article, I will discuss the situations where a debtor jointly owns property with someone else and the ramifications bankruptcy will have on that property.

The Homestead Exemption

When a person files bankruptcy, you are entitled to keep certain types of property up to a certain value. The property you get to keep is known as “exempt.” An example of exempt property is your residence, known as a “homestead.” In Massachusetts, if you own a home, you are entitled to an exemption in your homestead. As of March 2011, Massachusetts residents are entitled to an automatic homestead for $125,000. This means that if you have less than $125,000 in equity in your home, it is automatically exempt and you can keep your home in a bankruptcy. If you have more than $125,000 in equity, then you need to actually file a document at the registry of deeds in the county that your home is located known as a “declaration of homestead.” Filing this document will increase your homestead and protect the equity in your home up to $500,000.00.

However, if you have more equity in your home than $500,000, then your home could be soled in the bankruptcy to repay your debt. For example, if you have $600,000 in equity in your home, then $100,000 is not exempt and your home can be sold to satisfy your creditors. After the sale you will get $500,000, but the other $100,000 would be used to repay your creditors. In bankruptcy there are certain debts that a homestead will not protect you from, and your homestead is limited if you have not owned you home for at least 40 months. For more information on the limitations of a homestead in bankruptcy, you should consult with a qualified Massachusetts bankruptcy attorney.

The Trustee’s Power to Sell

What happens if you jointly own property with someone else and the property is not exempt? In Bankruptcy, the Trustee who is overseeing your case has the authority to force a sale of the entire asset, including the co-owner’s interest; even when the co-owner is not filing bankruptcy. See 11 U.S.C. 363(h).

However, the Trustee does not have the power to act independently and cannot simply sell the property. The Trustee must seek the Bankruptcy Court’s approval by filing a lawsuit in the Bankruptcy Court, known as an “adversary proceeding.” In this adversary proceeding, the co-owner will have the ability to present evidence to the court that the detriment that they will suffer is greater than the benefit to the creditors. Many times, the co-owner will be given the opportunity to purchase the debtor’s interest in the property at a discounted rate. If the property is sold, then the co-owner will be paid back their fraction of the ownership interest in the property after the Trustee’s expenses are paid.

Real Estate Ownership Scenarios

In bankruptcy, we typically see three situations where a debtor owns real estate jointly with someone else: home ownership with a spouse, co-ownership of a parents home, and co-ownership of investment property.

Home Ownership With a Souse

If you own your home with your spouse, chances are, you either own it as Joint Tenants with Rights of Survivorship (“JTROS”) or as Tenants by the Entirety. This means that both you and your spouse each own the whole home, as compared to you having ½ ownership and your spouse having ½ ownership. Then if you or your spouse dies, the other spouse automatically owns the whole.

There are clear advantages to owning your home with your spouse as Tenants by the Entirety, because it prevents once spouse’s creditors from interfering with the other spouse’s right of possession. This is also beneficial in bankruptcy in Massachusetts, because any interest that the debtor has as a tenant by the entirety is exempt “to the extent that such interest … is exempt from process under applicable non-bankruptcy law.” 11 U.S.C. § 522(b)(2). This means that in Massachusetts the debtor’s interest in their home that is owned with a spouse as tenancy-by-the-entirety is subject to attachment but not subject to levy or execution at this time and, so, the debtor’s right to possession cannot be interfered with unless and until the property is sold, or debtor and their spouse are divorced, or the debtor survives her spouse, in which event the trustee will be free to enforce his interest in the debtor’s real estate.

However, as I stated earlier, filing a declaration of homestead on your residence will protect up to $500,000 of the equity in your home, regardless of how you hold title with your spouse; therefore, it is always a good idea to go to your local registry of deeds and have one recorded. The declaration of homestead may be in either spouses name and will protect all the family members. It is also important to remember that a homestead is not available for investment property and can only protect property that you either live in, or you intend to make your home and permanent residence. You should contact a qualified bankruptcy attorney for more information on how a homestead can protect your home.

Joint Ownership of a Parent’s Home: The “Poor-Man’s” Will

It is not uncommon for elderly parents to decide to add their children to the deed of their homes for estate planning purposes. Typically, in order to save on the expense of paying an attorney to properly prepare a will, parents transfer title of their property to themselves and their children, as joint tenants. While this is an effective method of transferring property and avoiding probate upon the parents’ death, it can have undesired consequences because the parents’ property can be attached and seized by their children’s creditors. Moreover, as I discussed earlier in this article, if one of the children files bankruptcy, the bankruptcy trustee can sell the parents’ home to repay creditors.

If your parents have added you to the deed of their home, it is important to inform your bankruptcy attorney before your case is filed. A qualified attorney should be able to ensure that your parents’ property is properly protected.

Co-Ownership of Investment Property

There are very few exemptions that are available for investment/vacation property. Therefore, co-ownership of both investment and vacation property is nearly impossible to protect in bankruptcy unless there is no equity in the property. (the value of the property is equal or less than the amount owed on the mortgage.) If you file bankruptcy and you co-own investment or vacation property that has equity; you can be assured that the bankruptcy trustee will take the steps to sell the property.

Conclusion

Co-ownership of real estate presents numerous complex issues if one of the co-owners decides to file bankruptcy. If you co-own property with a spouse, parent or partner and you are facing financial difficulties, you should seek a qualified bankruptcy attorney for advice. A good attorney will be able to advise you of any potential issues that may arise, and take steps to ensure that you and your loved ones can keep your homes. Under no circumstances should you decide to try to transfer property out of your name, without advice from an attorney, because such a transfer could be seen as a fraudulent and would make it easier for a Bankruptcy Trustee to seize the property.

When clients consult with us about filing bankruptcy in Massachusetts we are forced to make a decision concerning what exemptions they wanted to claim. In the past, the choice was easy, if our client had more than $20,000 in equity in their home, then we would choose the Massachusetts exemptions in order to take advantage of the $500,000 homestead exemption. However, that meant losing protections on other items, such as a car or cash and our clients possibly having to either surrender property or hand over cash to the trustee.

In fact, Massachusetts’ exemptions were so outdated that other than the homestead, you were only afforded $700 for a car, $125 in the bank, 2 cows, 12 sheep and 2 pigs.

Now, on April 7, 2011, Massachusetts moves into the 21st Century. On that date, Massachusetts residents who file bankruptcy will have the benefit of choosing to keep their house, car, and some money to pay bills. While the federal exemptions will still be available and will be the best choice for many debtors considering bankruptcy, the increase in the new state exemptions will help a lot of people. Here is a review of the new exemptions available to debtors and chose the state exemptions:

Homestead: if you own your home, you are entitled to protect up to $500,000 in equity so long as you have lived there for 3.3 years; otherwise you are only entitled to $250,000. (investment, or vacation property is not eligible) The Massachusetts Homestead statute has recently been updated…but that is a topic of another post.

Automobile: In one of the most significant changes…you can now exempt $7,500 in an automobile. If you are handicapped or over 60, then you are entitled to $15,000. This exemption represents the “equity” in the vehicle. (if the Auto is worth $20,000 and you owe $15,000, then your exemption would be $5,000 which I allowable since it is less than the $7,500 exemption). Under the old statute, you were only entitled to $700.

Jewelry: You may now exempt up to $1,225 in personal jewelry.

Clothing, beds, appliances: The New Rule – All necessary wearing apparel, beds, bedding, 1 heating unit, 1 stove, 1 refrigerator, 1 freezer, and 1 hot water heater.

Furniture: Residents can now exempt $15,000 in home furniture. Under the old statute, you could only exempt $3,000.

Computer, TV, Sewing Machine: One sewing machine, one computer and one television, in actual use, not exceeding $300 each in resale value. The old statute did not exempt a computer or TV.

Cash for Rent: if you are a renter, then you are entitled up to $2,500 of cash in the bank (not to exceed your actual rent) to pay the rent for the dwelling unit you actually occupy.

Cash for utilities: you are now entitled to have up to $500 on hand to pay utilities. This is up from $75.

Checking & Savings: Cash or savings not exceeding $2,500. (up from $125).

Wages due and payable: the greater of 85% of the your gross wages or 50 times the greater of the federal or the Massachusetts hourly minimum wage for each week or portion thereof.

Tools for Trade or Business: if you have tools that you use in your trade or business you can now protect up to $5000, up from $500.

Materials and Stock Used in Trade or Business: a debtor can now exempt up to $5,000 in materials that you use in your trade or business. (up from $500).

Fishing equipment: Boats, fishing tackle and nets of fishermen actually used in their business, up to $1,500. This is an increase from $500 under the old statute.

Wild Card: You can now use up to $5,000 of your unused tool, auto, or furniture exemption to protect any other property; so long as the value of any single item does not exceed $1,000.

This list provides a brief summary of the new changes in Massachusetts’ exemption laws as they apply to bankruptcy. However it is not an exclusive list, nor should you rely on this list to try to file your own bankruptcy. Bankruptcy is an extremely complicated area of practice and a mistake could lead to the loss of your home or car or could result in your case being dismissed.

Debtor collectors have now turned to social media outlets such as Facebook, Twitter, MySpace, Friendster, LinkedIn, and other various social media web-sites to collect information on debtors.  There have also been reports in the media of debt collectors sending messages to Debtors, as well as their friends, family, and colleagues, through these social media sites.

These debt collectors are searching these social media sites for information on debtors, such as employment information, current residence, friends and family information, aliases, and nicknames.  This information can be used to help track down Debtors for collection purposes. They are also attempting to relay messages to Debtors through friends, family, and colleagues asking the Debtors to contact to collector at a specified phone number.

One way to avoid the use of social media against you is to closely monitor and manage your privacy settings.  Make sure that the details of your profile are not viewable by search engine or on the social media site itself. Also, closely monitor and screen who is attempting to connect to your social network.  Finally, reconsider the information that your publishing on the Internet.  It is nearly impossible to control that information once you send it into the Web.

If you have been served by a deputy sheriff or constable, or by first class mail, a document entitled “Application for Supplementary Process,” your problems with debt have become very serious.  Your Creditor(s) have already obtained a judgment for money against you in a separate legal proceeding. In all likelihood, you have received a copy of the complaint, relevant motions, and judgment associated with that proceeding. Supplementary process is the next step that enables creditors to collect monies owed to them.  Supplementary Process is used to compel a Debtor to pay the amounts due on the money judgment. This is a process that is permitted under the laws of the Commonwealth, specifically Mass. Gen. Laws ch. 224 s. 14.

After an  Application by a Judgment Creditor has been made to a District Court, you will be issued a summons by the Court, which commands your attendance a  hearing on a specific date and time.  The goal of the application and summons is to compel you to be physically present at a courthouse. This will allow the attorney for the Judgment Creditor to investigate your financial affairs and examine your ability to pay the outstanding judgment. Many collection attorneys send a financial worksheet to Judgment Debtors to fill out prior to the hearing date.  Otherwise, you will likely be handed this worksheet by the collection attorney on the day of supplementary process hearing.  In most cases, the Creditor’s attorney will insist that you enter into a monthly payment plan, or make a lump sum payment, if there are assets available to satisfy the judgment. In other words, your Creditors are placing you on a court supervised payment plan and schedule, and can use the District Court as an enforcement mechanism.

If you fail to appear at the scheduled Supplementary Process hearing, you will be defaulted by the Clerk, and a Capias will issue against you.  The court will also continue (reschedule) the hearing for a later date.  A Capias is a civil warrant, also called a “bench warrant,” for your arrest.  This warrant was issued because you have failed to obey the summons issued to you, and failed to be physically present at the Supplementary Process hearing.  Once the Capias is issued to the Creditor’s attorney, you will likely be contacted by a Deputy Sheriff from the Sheriff’s Department, who will provide you with instructions on where you must meet him/her prior to the continued hearing date. If you fail to cooperate with the Deputy Sheriff, you can be placed in custody by the Sheriff’s Department, and will be physically transported to the courthouse for examination, and will be required to explain to the Court your reasons for non-compliance with the summons.  In other words, there are great risks associated with being uncooperative during a Supplementary Process proceeding, and you should make every effort to comply with a Court issued summons or the Deputy Sheriff, until you decide to file for bankruptcy.

How can one avoid Supplementary Process and its perils?

The most certain method of stopping a supplementary process proceeding; collection attorney investigation of your financial affairs; court ordered payment plans; court summonses; oversight by the Sheriff’s Department; and arrest, is to file a Chapter 7 or Chapter 13 bankruptcy petition. The automatic stay, 11 U.S.C. s. 362, prohibits your creditors from engaging in collection activity against you after you have file a petition for relief under the bankruptcy code.  If you are subject to a supplementary process proceeding, a copy of your Notice of Bankruptcy Case filing can be provided to the Deputy Sheriff and/or the District Court, which will suspend that proceeding until you receive your bankruptcy discharge.  A bankruptcy petition has many benefits, and it is extremely effective in terminating the pains and perils associated with supplementary process.  Even if you have an inability to pay the judgment on the first hearing date, the Supplementary process action will remain ongoing and you may be required to go to the courthouse every 3-6 months, depending on the court’s schedule.  If you are currently subject to this proceeding, please contact one of our bankruptcy attorneys for more information on how to obtain a fresh start and stop collection activity against you.

Judge William C. Hillman, United States Bankruptcy Judge for the District of Massachusetts, recently issued a ruling that a Debtor’s Chapter 13 plan cannot be confirmed if a portion of the Debtor’s income is used to pay monthly expenses associated with a vacation property or second home. This opinion does not apply to investment properties, such as rental properties.

Judge Hillman ruled that a Debtor’s income that was dedicated to paying expenses for a vacation property (such as a mortgage) are not permitted and should be used to pay unsecured creditors; thus allowing the Chapter 13 trustee’s objection to a Debtor’s Chapter 13 plan.

In a Chapter 13 bankruptcy, a Debtor is permitted to deduct certain expenses from his income (such as food, clothing, utilities, etc.). The amount of money left over after all allowed expenses are paid is known as disposable monthly income. The disposable monthly income is paid to the Chapter 13 trustee who pays the money to the Debtor’s unsecured creditors. (for a more detailed explanation, visit our chapter 13 information page).

This ruling means that if a Chapter 13 debtor owns a vacation home; he/she is not permitted to include any of the expenses associated with associated with that property (such as utilities, taxes and mortgage) because the expenses are not reasonable and necessary. This ruling likely will apply to all types of vacation property, including time shares.

A vacation property is viewed as a luxury, and cannot be retained by a debtor in a Chapter 13 proceeding. The property must be liquidated and proceeds must be turned over to creditors, or surrendered in the bankruptcy proceeding. In other words, Chapter 13 debtors in Massachusetts will not be able to keep their vacation homes unless their creditors receive a 100% dividend/payout.