Question: What Happens To Real Estate That You Own In A Chapter 7 Case When It Is Not Your Residence?
Posted by LaShea Borden, Esq. 
August 28, 2009 
Bankruptcy, Case Study, Chapter 13 Bankruptcy, Chapter 7 Bankruptcy, Question and Answer 
Comment Many people tend to think that they can keep real estate that they own in a Chapter 7 case as long as they are current with the payments at the time the case is filed. However, that is not always true. Debtors must take care to disclose the status of real estate with regard to value, outstanding debt, and payment status to their attorney. No one, including the attorney, wants any surprises.
Facts: Debtor was living between her home and her mother’s home who she cares for. She had a mortgage on her home and her son lived in the house and paid the mortgage. She had approximately $14,000.00 in equity in the home. Her living arrangement with her mother was not disclosed during the consultation, review, or filing appointments.
At court, the debtor informed the Trustee of these things. This was the first time the attorney heard of this arrangement. She had also claimed the equity as an exemption under U.S.C. 11 section 522(d)(1). The Trustee determined this was an asset case and objected to the exemption on the basis that she could not exempt this equity because it was not her residential real estate since she resided at her mother’s home. All of her mail went to that address, her driver license had that address, and this was also the address she used for voter registration. The Trustee later filed a Motion to Sell the Real Estate which the Court granted.
This was not the client’s intention. She wanted to keep her home and eventually move back in permanently with her son. In an effort to save her home, she moved the Court to convert to Chapter 13 which was granted without objection by the Trustee. She must now fund a plan to pay money to her unsecured creditors.
The moral of this story is to fully disclose your assets and any arrangements involving those assets to the attorney. It is a matter of losing assets you think may be protected by exemptions which may not be the case. Those assets can be liquidated through sale in a Chapter 7 case by the Trustee to pay your unsecured creditors for the debts you owe. The attorney can best advise you on how to handle your assets. Remember that what you don’t disclose can hurt you by either losing the asset, forcing you into a Chapter 13, or most harshly losing the asset and not receiving a bankruptcy discharge at all.
Tags: Q&A: Small Business and Tax Liability
I am a small business owner who is thinking about closing down my business but my company still owes the IRS and the State of Kentucky for some unpaid payroll taxes and sales taxes. As the owner of the corporation, will I be responsible for paying these taxes if the business stops operating? If so, can I get rid of this tax liability by filing a Chapter 7 Bankruptcy?
It depends. If you were an active member of the corporation and involved in the day to day operations including the paying of bills, then you probably will be deemed to be a “responsible party” by the IRS. For the Kentucky withholding tax obligations, you may be deemed personally “responsible” simply by being an officer of the orporation even if you were not an active party in the bookkeeping operations of the business.
As a responsible party, you may be personally liable for any unpaid trust fund obligations of the corporation. What is a trust fund obligation? It is that portion of the tax liability that was withheld from an employee’s paycheck and not turned over to the government. The matching FICA obligation of the company is not a trust fund obligation and will be deemed uncollectible by the IRS if the company goes out of business. Also, all sales taxes collected from a customer are deemed to be trust fund taxes.
If your business does have to close down, then you may need to file an individual Chapter 7 bankruptcy in order to get relief from any personal guarantees that you may have obligated yourself to in order to get the business up and running. However, you cannot discharge in bankruptcy any trust fund tax obligations that you may have. You will have to work out a payment plan after the bankruptcy is over with the IRS and the state or you may consider filing a Chapter 13 in order to pay back the tax liabilities over five years without the accrual of interest or penalties.
Uncontested Divorce: Do You Still Need To Disclose All Of Your Assets?
Many couples who have decided to divorce want the marriage to be over as quickly as possible. This is understandable in light of the emotions associated with everything that the couple has had to consider in coming to this difficult decision. While moving on with life is a desired outcome, moving on by leaving the marriage with little or no assets can lead to resentment and more difficulty after divorce.
In dividing assets, it is just as important to know what one is giving up as it is to know what one is getting. It is encouraged for a couple to agree to the division of the marital property; however full disclosure of assets and debts is the only way to fully understand the complete financial picture of the marriage.
Many may believe that such disclosure is a waste of time since they have already agreed on who gets what. The importance of disclosure comes down the road when one discovers that the other had been putting a good portion of money into their retirement, or when one discovers that their name is on debt that they didn’t know about. Divorcing couples still want to believe in each other and not assume the worst, but these types of scenarios occur every day.
The bottom line is to be informed; know what you are giving up before signing an agreement. It may avoid pain from the past from coming into your future.
Chapter 13 Debtors Need To Be Able To Live On A Tight Budget If They Are Paying Their Creditors Less Than A 70% Dividend In The Western District Of Kentucky.
Typically, a Chapter 13 is filed by an individual or couple because their income exceeds the amount necessary to be able to qualify for total relief under Chapter 7. Chapter 13 can also provide debt relief but it requires the debtor to pay creditors some dividend back based on the disposable income left over after paying normal household bills. In the Western District of Kentucky, the courts are taking a careful eye to the debtor’s budget for the purpose of making sure that no money is spent unwisely in order to maximize disposable income that gets paid to unsecured creditors. According to the courts, attorneys now have the duty to advise their clients to reject expensive service contracts in order to switch insurance plans, internet and cable services, child care, cell and home phone service if a better deal exists. If your clients are retired, the courts feel that a cell phone is not a necessary expense and may disallow it from the budget. What dollar amount can you allow for food in the budget? According to the IRS guidelines which the courts are supposed to follow, you can spend $752.00 for food for a family of 4. However, in the Western District of Kentucky, for Chapter 13 budget purposes, you may be limited to spending $600.00 a month for food for four people which is $5 a day per person. Not hardly a lot if you are having to pay $2.32 for your kids school lunches through the Public School System.
This type of budget scrutiny by the court begs the question of whether it is worth it to have both adults in a household working outside the home creating a higher income that disqualifies them for Chapter 7 immediate relief. Rather, these hardworking couples can either deal with their creditors on their own or file a Chapter 13 plan to repay their debts. Unfortunately, if the couple elects to file a Chapter 13 and actually pay their creditors something, they may be subjected to the budget constraints set by the court for five years. It seems that the families who are trying to do the right thing by having both adults work are being punished unfairly by having to submit to a bare-bones budget in order to pay back more of their debt in a Chapter 13. I wonder if the family who chooses to create less income and have one parent stay home with the kids got it right – the opportunity to be a more involved parent, the opportunity to live with whatever budget they can afford, and the opportunity to pay no debt back through Chapter 7 relief.
Disclosure of Assets in a Bankruptcy: How Accurate Should You Be?
In a recent case in the Eastern District of Kentucky, the Judge found that debtors who failed to properly disclose their assets were not entitled to a discharge of their debts in bankruptcy. U.S. Trustee v. Haeberle, 08-10374, AP 08-1016.
In this case, which was not filed by our office, the debtors listed in their schedules “miscellaneous jewelry” valued at $10,000.00. The Trustee discovered that this was a misrepresentation by reviewing the debtors’ homeowner’s insurance policy which listed jewelry at $105,925.00 and home furnishings valued at $14,819.00. The Trustee required the debtors to turn over a list of all the items covered under the homeowner’s insurance policy. In addition, the Trustee conducted a deposition of the debtors who testified that it was their best belief that the jewelry was not worth more than $10,000.00.
The Trustee conducted an auction of the items and received $50,400.00 for the jewelry alone. The Trustee then filed a nondischargeability action against the debtors pursuant to 11 U.S.C. section 727(a)(2) and (a)(4) requesting the court to deny the debtors’ discharge on the basis that they attempted to hide assets from the Trustee. The court ruled in favor of the Trustee finding that because the debtors concealed the true value of the jewelry and other personal property, they should be denied a discharge of all of their debts.
Disclosure of all property owned by a debtor is critical when filing a bankruptcy. As can be seen by the above case, failure to be accurate on the bankruptcy schedules could result in losing those items and, more importantly, being denied a discharge of your debts in bankruptcy. An actual intent to deceive or hide assets could also be found to be criminal subject to jail time by the debtors if convicted. So remember, not only should all property be listed, it must also be listed with accurate values. And by signing the bankruptcy schedules, the debtors are swearing under penalty of perjury that the information is true and correct to the best of their knowledge.
Question: When should you consider filing for bankruptcy relief?
There is no perfect time to file for bankruptcy. Everyone’s situation is different, but the best time to seek legal advice is when you first become aware that you are unable to pay your bills on a timely basis or when you begin to receive phone calls from creditors. Debt can easily accumulate if you lose your job, incur unforeseen medical bills, run up credit card obligations or take undue risk with investment opportunities.
Even if you have waited until a judgment has been entered against you or your wages are about to be garnished, you can still file bankruptcy to stop the garnishment and obtain a fresh start … free of debt.
From a credit standpoint, filing for bankruptcy eliminates most if not all of your debt which allows you to begin the rebuilding of your credit. Most individuals can obtain good financing terms on a future loan within two years of filing for bankruptcy so long as their credit score has improved after the filing.
Because the stress can be overwhelming, you should seek the advice of a reputable bankruptcy law firm. They will outline your financial options and help you manage or eliminate your outstanding debt. It’s a great feeling knowing that you will soon be on the road to financial recovery.
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The KY Bankruptcy Blog, hosted by Julie O'Bryan, is designed to give real life examples of ways to overcome obstacles faced prior to, during and after filing a bankruptcy. Recent Court decisions and bankruptcy laws will be discussed as they relate to these real life situations. The blog will also discuss relevant family law issues that arise with filing bankruptcy and information pertaining to restoring credit after bankruptcy.
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