Category Archives: Bankruptcy Fraud

If You Are Having A Problem With Your Home Loan Payment Call a Bankruptcy Attorney


One of the most frustrating parts of my job is over and over again talking to people that file Chapter 13 bankruptcy cases to stop a foreclosure or eviction without proper legal advice from an actual bankruptcy attorney. By the time they speak to me there is usually too much water under the bridge for me to get involved and actually obtain them relief under the Bankruptcy Code they are entitled to. I say entitled to because the Bankruptcy Code is the law. You just have to follow it and get relief. Most skeleton Chapter 13 bankruptcy petitions should never have been filed to begin with.

Five Steps To Help Prevent Getting Scammed

These five steps cannot guarantee you will not get scammed, but they will limit your risk to getting scammed, losing your house and paying too much for the services provided to you.

1. Never ever wait until the last minute to start getting information; the problem did not come up overnight, so the solution will not come overnight either….
2. Make sure the person helping you signs the documents filed with the court; not you;
3. Only do business with someone that is local in your area and not hundreds of miles away;
4. Only do business with someone you have actually met in person and they have an office you can walk into if you want;
5. Google the phone number, fax number, email address, name of person or business name you are dealing with … basically Google each and every bit of identifying information you are given . . . most likely someone has already complained about them and Google will find it for you.

The Automatic Stay is a Jewel to be Coveted, Not Abused

The automatic stay is the backbone of the bankruptcy process and is the single most important and precious jewel to be coveted, not abused. Section 362 of the Bankruptcy Code provides the very lengthy law of how the automatic stay is implemented. A general description is the automatic stay stops almost all collection activity by creditors to give the bankruptcy filer breathing room to figure things out and reorganize or discharge their debts according to the Bankruptcy Code. That includes lawsuits, repossession, foreclosure, wage garnishment, levies, phone calls, letter and on and on. The automatic stay is the most powerful tool for a Bankruptcy Attorney to help people or businesses in financial distress. There are many limits in the automatic stay and for purposes of this article I will focus on the people filing their own cases with advice from the wrong people. What I find is multiple bankruptcy petitions filed by people trying to save a house more often than not. The first petition filed for relief they receive an unlimited automatic stay. There are no timing restrictions as long as the case remains open and not dismissed. This is what everyone should want, the bankruptcy case, whether Chapter 13, Chapter 7 or some other chapter of the Bankruptcy Code, to progress properly and the bankruptcy filer is not in jeopardy of the automatic stay not being in place. The single best way to ensure this is retaining an experienced bankruptcy attorney to file your case. If your home is in jeopardy do not trust a realtor or some other non-bankruptcy professional to help you.

Danger of Multiple Bankruptcy Filings

What I see over and over again with bankruptcy filers getting bad information is there case is just dismissed for not filing the proper documents in the beginning or not timely filing the proper documents after the case is filed. What the unscrupulous realtor, attorney or company will do is tell you or give you the basic forms to file a skeleton bankruptcy petition to obtain the automatic stay. That includes the voluntary petition, statement of social security number, creditor matrix and most likely an application to pay the $310 court filing fee in payments. The really horrible people will not even tell you about the application to pay the court filing fee in payments and make you waste the entire $310 even though they know the case will just be dismissed. They know the case will be dismissed because the forms described above are all they are going to help you with. That is it. You will have 14 days from when the court enters an order for you to file the rest of the documents to actually complete the petition. So the bankruptcy filer is now representing themselves and has only filed the basic forms to get the case started and does not know what to do next…… The bankruptcy filer will have paid whatever the unscrupulous person charge, usually well over a thousand dollars or more, plus the court filing fee of $310 and the Chapter 13 bankruptcy case is dismissed usually within three weeks.

If your first case is dismissed for some reason and you file a second case within a year you only get a 30 days automatic stay unless the stay is extended within that 30 days. There is no guarantee the court will extend the automatic stay and if a creditor objects to the extension it is even less likely the automatic stay will be extended. The third case filed within a year gets absolutely no automatic stay unless the automatic stay is imposed. Again, there is no guarantee the court will impose the automatic stay.

Required Credit Counseling Course Completion Prior to Filing a Bankruptcy Case

Another trap that realtors and unscrupulous people do not tell the bankruptcy filer is that they must complete the credit counseling course prior to filing for bankruptcy. The credit counseling only takes a few hours to complete and should cost less than $10.00 to complete. Skeleton Chapter 13 bankruptcy petition after skeleton bankruptcy petition is filed without the bankruptcy filer completing the credit counseling course prior to the filing of the case. I am a Bankruptcy Attorney that has either filed or been involved in literally thousands of bankruptcy cases and I only know of one or two circumstances in which the court allowed someone to take the credit counseling course after the bankruptcy case was filed or waived the requirement entirely. Since 2005 BACPA changes to the Bankruptcy Code, Section 109(h)(1) requires the completion of credit counseling within the 180-day period prior to the filing of the petition. Section 109(h)(3) provides a temporary exemption from that requirement if the bankruptcy filer submits a certification that: (i) describes exigent circumstances that merit a waiver of the requirements of [section 109(h)(1)]; (ii) states that the bankruptcy filer requested credit counseling services from an approved nonprofit budget and credit counseling agency, but was unable to obtain the services referred to in [section 109(h)(1)] during the 7-day period beginning on the date on which the debtor made that request; and (iii) is satisfactory to the court. Section 109(h)(4) provides a total waiver if the Court determined, upon notice and hearing, that the debtor is unable to complete the credit counseling requirement due to incapacity, disability, or active military duty in a military combat zone. If you have in jeopardy of losing your home just complete the credit counseling course before filing the bankruptcy case and do not play around with attempting have the court give you more time or waive the requirement. It is just not worth it.

Do Not Fall For the Mortgage Litigation Scam

The mortgage litigation scam is only a ploy for criminals to get around the laws making it a criminal act to take money upfront to do a loan modification and a ploy to get around only charging you $150 as a bankruptcy petition preparer. I keep writing about this and it keeps happening. I do not know what the solution is. I try and educate people to enforce their rights and apparently they do not take my advice. Or there are just more and more of these unscrupulous people replacing the ones that go away. If you missed mortgage payments and owe thousands and thousands of dollars because you did not make the mortgage payments rarely are there issues for you to litigate. Especially if you are a consumer and this is regarding your home. We keep finding people in the Bay Area doing business with businesses in Southern California to litigate mortgage issues that appear to be purely scams. If you are litigating a mortgage problem that is legitimate you should not be directed to file a skeleton bankruptcy petition that you sign and file yourself. That makes no sense. When an attorney takes your money to do something they are supposed to sign and file the documents on your behalf because they are representing you and take on the liability for their work. That is how it is supposed to work. Also, why do business with someone that is hundreds of miles away that will most likely never give you your money back when you figure out it was a scam? Are you going to sue them for the $1,000 – $4,000 you gave them already? I seriously doubt it and I have yet to see it.

What Not To Do If You Know You Will Receive A Significant Inheritance When Filing Bankruptcy


The definition of property of the estate under Section 541 of the Bankruptcy Code is very broad. So if you know you are going to get a significant inheritance why file bankruptcy? Like everything I guess “significant” could mean something different depending upon the circumstances. If you only have $50,000 in debt and know you will receive $100,000 from someone’s estate that has already passed, that is a significant inheritance in my opinion. An argument could be made for still filing for bankruptcy protection, but be careful. The inheritance is part of the bankruptcy estate, must be disclosed and held for the benefit of your creditors if you file bankruptcy. The following is a rundown of what not to do if you know you will receive a significant inheritance when filing bankruptcy. This Ninth Circuit Bankruptcy Appellate Panel case deals with what happened to a debtor that received a significant inheritance right before filing for bankruptcy protection in the Bankruptcy Court for the Southern District of California. See: Jason Scott Brown v. Thomas H. Billingslea, Jr., Chapter 13 Trustee; 9th Cir. BAP No. SC-14-1388-JuKlPa. After discussing the initial Chapter 13 bankruptcy filing and then Mr. Brown’s appeal, this article concludes with what is currently taking place after this appeal (spoiler alert) in the Chapter 7 case. What did the Chapter 7 Trustee do upon conversion for the benefit of Mr. Brown’s creditors?

In this case the debtor, Jason Scott Brown, filed a Chapter 13 Bankruptcy petition on December 13, 2013, three days before the closing of the sale of a property he inherited when his father, Herbet D. Brown, who passed away July 20, 2012. The sale of the inherited property closed on December 16, 2013, and Mr. Brown received $65,812 in proceeds. I do not really know why Mr. Brown filed for bankruptcy knowing he was entitled to over $65,000 from the sale of the property. I will not begin to speculate because there may be a very legitimate and reasonable reason why. I just do not know what it is. What I do know is what happened next in his Chapter 13 bankruptcy case. Mr. Brown represented in his Schedule B that he was only going to receive $2,500 in inheritance and his Schedule F listed $33,499 in general unsecured debts. Also upon receiving the probate funds Mr. Brown did not amend his schedules.

At the Section 341 meeting of the creditors the Chapter 13 Trustee and Mr. Brown entered into a pre-confirmation modification of the Chapter 13 Plan requiring Mr. Brown to turn over to the trustee for the benefit of his creditors $3,224 in probate proceeds within 45 days of receiving the funds. Why $3,224 instead of the $2,500 he listed in this schedules is unknown. At some point the Chapter 13 Trustee found out about the actual amount of the proceeds Mr. Brown was receiving from the sale of his deceased father’s house via probate. In April 2014 the Chapter 13 Trustee moved for dismissal of the case and objection to confirmation arguing that $37,569 should be turned over to the trustee for the benefit of unsecured creditors.

The Chapter 13 trustee’s objection to confirmation included documents from the probate proceeding and sale of the house. Again for some unknown reason Mr. Brown’s brothers assigned him their beneficial interest in the inheritance from their father’s estate on August 7, 2013. At some point in May 2014, Mr. Brown changed Bankruptcy Lawyers and immediately amended his schedules to allege his share of his father’s estate was only $12,372 and fully exempt from creditors. Mr. Brown alleged that his three brothers were each entitled to 25% of the inheritance. After some more legal wrangling the Chapter 13 Trustee also requested the case be converted to Chapter 7 given Mr. Brown did not disclose the inheritance and this was an abuse of the bankruptcy process. See: Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764, 767 (9th Cir. 2008).

In another strange turn of events, Mr. Brown’s Bankruptcy Attorneys on his behalf on June 17, 2014, filed a status report telling the court that Mr. Brown misunderstood that the inheritance was property of the bankruptcy estate. Therefore to make it right Mr. Brown would pay 100% of his unsecured debts in the Chapter 13 Plan after objecting to a claim of a creditor. See section below about the Chapter 7 case regarding this objection to claim.

At the hearing on the Chapter 13 Trustee’s objection to confirmation on July 8, 2014, Mr. Brown informed the court that his part of the inheritance was put into his business and the rest of the inheritance as paid in CASH to two brothers and by check to a third brother. At this hearing the Bankruptcy Court noted that given the source of payment for creditors, the inheritance was gone, continuing to pursue Chapter 13 reorganization was not in good faith. The Bankruptcy Court also found based upon the facts that cause existed to convert the Chapter 13 case to Chapter 7 so that a Chapter 7 Trustee could seek return of the inherited funds via fraudulent transfer or transfer avoidance powers for the benefit of creditors. Mr. Brown timely appealed the conversion of his case to Chapter 7.

Cause To Convert The Case To Chapter 7

On appeal the Ninth Circuit Bankruptcy Appellate Panel found the Bankruptcy Court’s finding of cause was not clearly erroneous. The Ninth Circuit BAP also noted that Mr. Brown’s appeal focused on the fact that Mr. Brown proposed a 100% Chapter 13 Plan and not that the Bankruptcy Court’s findings were erroneous. Also cleverly noted is that Mr. Brown never actually filed an amended plan or motion to modify the confirmed chapter 13 plan to pay creditors 100%. Mr. Brown only orally alleged he would propose a 100% chapter 13 plan upon objecting to a creditor’s claim. If successful with the claim objection Mr. Brown “believed” he would be able to pay unsecured creditors 100%. How could this be possible though? Mr. Brown’s income was only social security and was not sufficient to fund a 100% Chapter 13 Plan and he used and gave away all of the inheritance . . . . so.

The 9th Circuit BAP also noted that Mr. Brown’s case was pending for seven months and Mr. Brown could have paid all of his unsecured creditors in full with the inheritance and did not even though the Chapter 13 Trustee requested him to turn over the inherited funds. Mr. Brown instead used the inheritance for his business and paid the inheritance to his brothers. Mr. Brown’s creditors suffered prejudice from the loss of the money.

Conversion of the Chapter 13 to Chapter 7

A case can be converted to Chapter 7 for cause, including the failure to make Chapter 13 Plan payments. In Mr. Brown’s case he did not pay the Chapter 13 Trustee the $3,224 of the inheritance he agreed to turn over in the pre-confirmation modification agreement he signed. Section 1307(c)(4) applies to debtors when Chapter 13 Plan payments commence and then the debtor pays less than what the Chapter 13 Plan on file requires. See: In re Mallory, 444 B.R. 553, 558 (S.D. Tex. 2011) (citing In re Jenkins, 2010 WL 56003, at *2 (Bankr. S.D. Tex. Jan. 5, 2010). Mr. Brown argued he did not turn over the $3,224 on advice of this counsel.

Lack of Good Faith

The Bankruptcy Court found two factors of lack of good faith by Mr. Brown: (1) that Mr. Brown misrepresented facts in his petition or plan, unfairly manipulated the Bankruptcy Code, or otherwise filed his petition or plan in an inequitable manner, and (2) there was a presence of egregious behavior. In response Mr. Brown argued he never misrepresented facts in this petition or plan and he disclosed the inheritance to the court. The Ninth Circuit Court of Appeals discussed two cases: (1) Marrama v. Citizens Bank of Mass., 549 U.S. 365, 368 (2007) and (2) In re Rosson, 545 F.3d at 771; Levesque v. Shapiro (In re Levesque), 473 B.R. 331, 336 (9th Cir. BAP 2012).

In Rosson the debtor communicated to the Bankruptcy Court that he was going to receive a large arbitration award to fund his Chapter 13 Plan. When Rosson received the award he did not turn over the funds to the Chapter 13 Trustee and the Bankruptcy Court found Rosson was rebelliously horsing around with bankruptcy estate assets and therefore converted the Chapter 13 case to Chapter 7. Rosson then tried to voluntarily dismiss his Chapter 13 case and the Bankruptcy Court denied the motion. The decision was affirmed upon appeal.

In Marrama the debtor filed a Chapter 7 bankruptcy case and allegedly misrepresented the value of a piece of real property in Maine and denied transferring the property into a trust for no value during the year prior to filing Chapter 13 to protect the property from his creditors. After the debtor admitted to the above improprieties he requested conversion to Chapter 13. His main creditor objected saying the conversion was in bad faith. In Marrama the debtor argued the information provided incorrectly about the Maine property were due to scrivener’s error and that now that he is employed he was eligible to proceed under Chapter 13. The Bankruptcy Court denied conversion to Chapter 13.

Mr. Brown on appeal tried to argue his facts are not like those in Rosson or Marrama. The 9th Circuit BAP was not convinced. They provide the following in support of a finding of bad faith:

– Mr. Brown’s failure to provide an accounting of the inheritance funds was bad faith;
– Mr. Brown’s explanation for disbursing the funds to his brothers, but found that his explanation did not justify his actions when the Chapter 13 Trustee had made demands on Debtor to place the funds in Trustee’s lockbox account or deposit the funds in his counsel’s client trust account;
– Evidence showed that Mr. Brown already had the proceeds from the sale of his father’s house at the time he filed his schedules but Mr. Brown disclosed that he anticipated receiving only $2,500 from the probate estate. There is no explanation in the record from Mr. Brown as to how he came up with the $2,500 number;
– Mr. Brown claimed his brothers were entitled to 75% of the inheritance but his brothers had filed waivers of their beneficial interests with the probate court.

Best Interest of Creditors

Another factor of consideration is the best interest of creditors when converting or dismissing a case. Mr. Brown argues that now that there are no inheritance funds to distribute to creditors the case should remain a Chapter 13 case and allow Mr. Brown to pay creditors via the Chapter 13 plan. The Bankruptcy Court correctly originally noted Mr. Brown’s income was not sufficient to fund a 100% Chapter 13 Plan and the inheritance was gone. On appeal the Ninth Circuit Bankruptcy Appellate Panel noted there was no court order allowing Mr. Brown to dispose of the inheritance. Under Section 348(f)(1)(A) Mr. Brown argues that the inheritance has been eliminated from the bankruptcy estate therefore making the Chapter 7 case a “no asset” case.

This is a strange argument given that if it were true, then any Chapter 13 debtor could file Chapter 13 after disposing property of the bankruptcy estate fraudulently, then convert to Chapter 7 and creditors would get nothing? Mr. Brown is making this argument in an attempt to remain in Chapter 13 and not face being sued for fraudulent transfer of the inheritance or have his brother’s potentially sued for the turnover of the inheritance funds their received by the Chapter 7 trustee upon conversion. That is the whole point in converting the case really. Chapter 13 Trustee’s traditionally do not seek to avoid fraudulent or preferential transfers of assets. The 9th Circuit Bankruptcy Appellate Panel provides Section 348(f)(1)(A) is not a “safe harbor” for debtors that fraudulently dispose of property of the bankruptcy estate while in Chapter 13. See: Wyss v. Fobber (In re Fobber), 256 B.R. 268, 279 (Bankr. E.D. Tenn. 2000).

Mr. Brown also argues that upon dismissal creditor would be free to collect against Mr. Brown from his potential assets. Mr. Brown is arguing creditors would be worse off with conversion to Chapter 7. More or less Mr. Brown wants to stay in Chapter 13 and try and pay his creditors via the Chapter 13 Plan 100%. The problem again is that Mr. Brown’s income is not sufficient to pay creditors 100% and Mr. Brown never actually filed a motion to modify his plan to pay creditors 100% of the allowed claims. The Ninth Circuit BAP noted there is no evidence that Mr. Brown’s creditors would receive any prompt payment if the Chapter 13 case was dismissed and held there was no error in Bankruptcy Court’s conversion to Chapter 7.

Absolute Right To Dismiss Chapter 13 Case

There kind of used to be an absolute right to dismiss a Chapter 13 case. Section 1307(b) provides: On request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable. There was a split in authority between different circuit courts whether this was an absolute right. In cases where there was improper conduct of the debtor some circuit courts held a debtor should not be able to dismiss the Chapter 13 case. In other circuits court held that Section 1307(b) does not provide for a good faith or bad faith component but says on request of the debtor at any time the court shall dismiss a case. The 9th Circuit BAP cites In re Rosson, 545 F.3d at 771, 774. The right to convert pursuant to Section 1307(b) is not absolute but a qualified right to prevent an abuse of the process pursuant to Bankruptcy Code Section 105(a). Section 105(a) provides: The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.

The bankruptcy court is after all a court of equity or fairness. So, it is not fair to creditor or the bankruptcy process to make misrepresentations in your schedules, mislead the bankruptcy court and trustee, or dispose of bankruptcy estate assets without permission of the court and then try and voluntarily dismiss your Chapter 13 case.

So What Took Place In The Chapter 7 Case After Conversion?

Well first of all, something that was not brought up in the appeal, Mr. Brown on September 9, 2014, filed an objection to the claim they mentioned in their argument to stay in the Chapter 13 case and pay creditors 100%. On October 27, 2014, Mr. Brown then filed an amended objection to the claim to correct a problem in the first objection to the claim. Mr. Brown was arguing that if this claim was not allowed then he could pay his creditors 100% and the case should not be converted. The objection is meaningless given the case was converted to Chapter 7 and Mr. Brown lost the appeal. The Chapter 7 trustee will now object to claims if there are grounds to object. I just thought it interesting that Mr. Brown in fact filed the objection to the claim.

On October 14, 2014, Santander filed a motion for relief from stay to request permission from the Bankruptcy Court to repossess Mr. Brown’s 2008 Dodge Caravan for his failure to make the monthly vehicle loan payments. This is a problem when a Chapter 13 case is converted the Chapter 7. In some Chapter 13 cases the monthly vehicle loan payment is paid through the Chapter 13 Plan. Some plans call for payments on the vehicle loan before a Chapter 13 Plan is approved by the court and then the Chapter 13 Trustee makes payments to the vehicle loan company. So in Mr. Brown’s case he either stopped making his vehicle loan payments or while his Chapter 13 case was pending for the last ten months Santander did not receive any payments from the Chapter 13 Plan. On November 5, 2014, the Bankruptcy Court granted the motion for relief from stay giving Santander permission to repossess their collateral, the 2008 Dodge Caravan.

On April 21, 2015, after conclusion of the Section 341 meeting of the creditors the Chapter 7 Trustee, Christopher Barclay, filed his notice of abandonment of property of the bankruptcy estate. One of the arguments on appeal by Mr. Brown was that in the Chapter 7 case there would be no assets to distribute to creditors and the Chapter 7 case would therefore be a “no asset” case so the case should remain in Chapter 13. The filing of the notice of abandonment of property of the estate kind of confirms there are no assets. The Chapter 7 Trustee did not abandon the bankruptcy estates claim against Mr. Brown for transferring the inheritance or Mr. Brown’s brothers that received the inheritance.

Chapter 7 Adversary Proceeding

On May 19, 2015, the Chapter 7 Trustee filed an adversary lawsuit against Mr. Brown and his three brothers for conversion and requesting punitive damages, objecting to Mr. Brown receiving a discharge and/or revocation of discharge pursuant to Sections 727(a)(2(A), 727(a)(2)(B), 727(a)(3), 727(a)(4), 727(a)(5) and 727(c). The adversary lawsuit also seeks avoidance of the post-petition transfer of the inheritance pursuant to Section 548 of the Bankruptcy Code. Adversary Case No. 15-90085-MM. As for timing, remember the appeal was filed on August 12, 2014, and the court entered the order converting the case to Chapter 7 on July 28, 2014. The Ninth Circuit Bankruptcy Appellate Panel entered their decision on October 26, 2015, affirming the bankruptcy’s conversion of the case to Chapter 7. Sometimes an adversary lawsuit will be stopped or stayed due to an appeal being filed. In this case the court held the adversary lawsuit should continue regardless of the appeal.

Motion to Dismiss Adversary Proceeding

On June 19, 2015, the three Brown brothers, Cutis, Kenneth and Christopher filed a motion to dismiss the adversary lawsuit against them alleging that the claims against them of the bankruptcy estate do not exist upon conversion to Chapter 7 pursuant to Section 348(f)(1)(A) of the Bankruptcy Code. Mostly the motion to dismiss alleges deficiencies in the timing of the adversary complaint and its causes of action.

Subsequent First Amended Adversary Complaint

On June 29, 2015, the Chapter 7 Trustee filed a first amended complaint and reply to the Brown Brother’s motion to dismiss the case. On July 27, 2015, the Brown Brother’s filed an answer to the first amended complaint filed against them. On August 4, 2014, the debtor, Jason Brown, filed an answer to the first amended complaint. Again, note the appeal was not decided until October 26, 2015.

So, as of right now the debtor, Jason Brown, and his three brother’s motion to dismiss the adversary complaint were denied by the court and the appeal failed to undo the conversion to Chapter 7. The Chapter 7 case will continue and so will the adversary lawsuit. The discovery deadline, the process of obtaining evidence, is January 21, 2016 and the next status conference hearing in the case is scheduled for January 16, 2016, at 10:00 a.m.

To Sum This Case Up So Far

Mr. Brown received over $50,000 in inheritance and had under $40,000 in general unsecured debts. As a result of choosing to not pay his unsecured creditors in full in the original Chapter 13 case or negotiate settlements with his creditors with lump sum cash payments from the inheritance outside of bankruptcy, Mr. Brown had to fight about the terms of his chapter 13 plan, litigated the conversion of this case to chapter 7 and lost, filed and lost an appeal regarding the conversion to Chapter 7 and is now having to litigate his alleged fraudulent transfer of the inheritance to his three brothers. Mr. Brown is also facing not receiving a discharge at all in the Chapter 7 case and more or less getting nothing from having filed bankruptcy to begin with. To really put the cherry on top the Chapter 7 Trustee is seeking punitive damages to punish Mr. Brown for his alleged misconduct via conversion. By my estimation Mr. Brown, not counting his three brother’s mounting legal fees, Mr. Brown may have incurred over $20,000 in attorneys’ fees and costs already and the adversary lawsuit is not over yet. At what point will the attorneys’ fees and costs exceed the original inheritance received by Mr. Brown?

What Happens if I Do Not Disclose All Assets in my Bankruptcy Petition?

By Ryan C. Wood

When you file for bankruptcy you are obligated to disclose all of your assets and all of your debts in your bankruptcy petition truthfully and under penalty of perjury. Failure to disclose may have many negative consequences such as the trustee in a Chapter 7 bankruptcy case liquidating your undisclosed asset and providing it to your creditors or the denial of a bankruptcy discharge. A debtor can also be sentenced to prison and fined. Just ask ex-Philly baseball player Lenny Dyskstra. Mr. Dykstra was sentenced to six months in federal prison and ordered to pay $200,000 in restitution in 2012. This article focuses on less substantial bankruptcy fraud.

You must disclose all of your assets when filing for bankruptcy.

You must disclose all of your assets when filing for bankruptcy.

Take the case of In re: Gronlund (No. 13-1566, B.A.P. 9th Circuit, August 2014). In this case, Mr & Mrs. Gronlund filed for Chapter 7 bankruptcy protection. They were overly detailed in listing their personal property, down to where their pots and pans were listed in their house. They did not list their interest in real estate in Mexico. The Ch. 7 trustee noticed income on their tax returns that was not disclosed in their bankruptcy petition. During their 341 meeting of creditors, Mr. Gronlund admitted to receiving $2,500 in interest only payments each month from the note derived from the Mexican property (“Mexican Note”). Mr. Gronlund testified that he did not think to list the Mexican Note because he already sold the property to a Mr. Rezai. Mr. Gronlund was not consistent on where Mr. Rezai lived. The trustee continued the meeting of creditors to give the Gronlunds an opportunity to amend his schedules. The Gronlunds never did so and the trustee filed an adversary complaint to deny the Gronlunds their bankruptcy discharge under 11 U.S.C. §727(a)(2)(A) and (a)(4)(A) indicating the Gronlunds concealed their interest in the Mexican property and making false oaths. The Gronlunds filed their amended schedules after the adversary complaint was filed. The schedules indicated that even though the Gronlunds have an interest in the Mexican Note, the Note had more encumbrances than it was worth (the Gronlunds indicated the Note was worth about $450,000 and the encumbrances were around $470,000). There were no proof of claims filed for the encumbrances and Mr. Gronlund tried to introduce documents that he believed would prove the existence of the encumbrances, but the bankruptcy court did not find the documents credible. A Special Mexican Real Estate Counsel testified for the trustee indicating that there were no encumbrances recorded against the Mexican property and that the property was actually worth about $530,000. Mr. Rezai consistently paid the Gronlunds $2,500 every month for the past four years. For the Gronlund’s defense, Mr. Gronlund indicated he was very stressed during that time due to family illnesses, supporting injured family members, had to testify as a witness in a trial that was prosecuting his friend for murder, and business losses. He hired an affordable bankruptcy attorney and asked his bookkeeper and employee to assist in his bankruptcy case rather than take care of it himself. He indicated his bankruptcy attorney received all the information and already told the attorney to fix the first two drafts. He did not review the third draft because he thought his bankruptcy attorney had everything fixed and all his schedules were accurate.

Pursuant to 11 U.S.C. §727(a)(2), a debtor will not receive a discharge if he has concealed property within one year before filing of the petition or property of the estate after filing the petition with the intent to hinder, delay, or defraud a creditor or an officer of the estate. The bankruptcy court indicated the Gronlunds concealed the Mexican Note because they failed to list the asset in the initial schedules, didn’t list the $2,500 payments, being evasive at the meeting of creditors and later claimed that the Mexican Note was over-encumbered. The bankruptcy court based their findings of the Gronlund’s intent to hinder, delay or defraud based on their conduct and circumstances surrounding the filing of the petition and how they acted afterwards. Given the Gronlunds were very sophisticated in business it was very suspicious the only thing left out of the schedules was their only asset with significant value.

Pursuant to 11 U.S.C. §727(a)(4)(A), a debtor will not receive a discharge if they “knowingly and fraudulently, in or in connection with the case made a false oath or account.” The bankruptcy court indicated that the Gronlunds failed to list the $2,500 payments received and failed to list the Mexican Note in their schedules and meeting of creditors. Since the note was a valuable asset worth between $450,000 – $530,000, the fact was very material in the case. Failure to list this as an asset was detrimental to the estate. The court believed the Gronlunds knowingly made those statements since they revised two previous drafts of the petition and just didn’t review the third one, especially when the $2,500 was a significant amount of their monthly income. The bankruptcy court also believed that the Gronlunds had the fraudulent intent to deceive their creditors and therefore denied the Gronlunds discharge. The Gronlunds appealed the bankruptcy court’s ruling but the 9th Circuit Bankruptcy Appellate Panel agreed with the bankruptcy court’s rulings.

The moral of the story is to always disclose everything to your bankruptcy lawyer and in your bankruptcy petition. You may think that an asset is not worth anything or that something is not important enough to disclose to your bankruptcy attorney. Something may seem insignificant to you but may have huge consequences in your bankruptcy case.

Can I Go On Vacation Before Filing Bankruptcy?

By Ryan C. Wood

How do you have money to on vacation but no money to pay your debts? In case you did not know this previously I am going to let you in on a not so secret rule in bankruptcy: it is generally not a good idea to go on vacation right before filing for bankruptcy. Doing so may look like and be an abuse of the bankruptcy process and your case may be dismissed or the discharge of your debts denied.

Pursuant to 11 U.S.C. §707(b)(1) the court may dismiss a case “if it finds that the granting of relief would be an abuse of the provisions of this chapter.” Whether the court finds abuse depends on the circumstances of each case. If the circumstances are the fact that you really needed to have a vacation (with no other explanation) then it probably does not bode well for your bankruptcy case. Essentially you are taking a vacation at the expense of your creditors that you are alleging you cannot afford to pay anymore. Rather than paying for your vacation you could have used those funds to pay some of your creditors. If you are going out of town for a legitimate reason, such as work related reasons (for example, you have to pay all the expenses yourself but your employer will reimburse you in the future) or if there are family emergencies (for example, a loved one is very sick, or you are going to a funeral) then you can explain those reasons to the judge to dispute the motion to dismiss or claim of abuse. If a motion to dismiss is filed in your case pursuant to §707(b), it is highly advisable that you seek the services of a bankruptcy lawyer to help you oppose the motion.

It is generally not a good idea to go on vacation before filing bankruptcy.

It is generally not a good idea to go on vacation before filing bankruptcy.

If you used your credit cards during the vacation right before filing your case the problem may gave just become worse. Creditors could file an adversary proceeding against you to have that debt or all of your debts be deemed nondischargeable pursuant to 11 U.S.C. §523(a)(2) due to fraud or 11 U.S.C. §727. An example of fraud is if you rack up your credit card debt for luxury goods within 90 days prior to filing for bankruptcy. What are considered luxury goods? Luxury goods are anything that is not reasonably necessary for the support or maintenance of you or your dependents. Going on vacation, big screen TVs, electronics, nice purses, jewelry or shoes may be examples of luxury goods.

You may be asking yourself: “How does the United States Trustee or a party in interest find out you went on vacation or spent money on luxury goods?” There are a variety of different ways they may find out. Most Chapter 7 trustees require that your Bay Area or San Jose bankruptcy attorney submit bank statements as part of the documents to be sent to the Chapter 7 trustee after your bankruptcy case is filed and before your meeting of creditors. Even if you paid for your vacation with cash or by debit card from your checking account, the Chapter 7 trustee will see the transactions at the location you are withdrawing the money (for example, if you withdrew cash out of the ATM in Hawaii, it will show cash withdrawal in Hawaii). Or if you withdraw a huge chunk of cash prior to going on vacation the Chapter 7 trustee may question what the huge chunk of cash may be used for. Of course, if you are using your credit cards, it will show up on your credit card statement. If the Chapter 7 trustee finds something suspicious from the documents provided he or she may inform the United States Trustee. The United States Trustee is normally the one who will file motions to dismiss your case for abuse of the bankruptcy process under 11 U.S.C.§ 707. Other parties in interest (i.e. your creditors) may also have the right to file an objection based on abuse of process under 11 U.S.C.§ 707.

Why would buying luxury goods on your credit card before filing bankruptcy be considered fraud? It is presumed to be fraud because it looks like you are taking advantage of your creditors. If you know you are going to file for bankruptcy and you max out your credit card balances it is considered fraud because you “borrowed” the money without ever having any intention of paying the money back. Of course, buying luxury items within the 90 day window is only presumed to be fraud, but you can always dispute the presumption by providing proof that at the time you used the credit cards you had every intention of paying the money back. You can show this in several ways: providing evidence that you have been making your payments every month, providing evidence that you had funds to pay back the credit at the time you made the purchases, or anything else that proves you had the intention of paying back the debt. If something happens afterwards that changes your financial situation such as a decrease in pay or loss of job that makes filing for bankruptcy a necessity you can explain that situation to the judge to dispute the presumption that you committed fraud. You should consult with a bankruptcy attorney to help you if you have an adversary proceeding filed against you for nondischargeability of a debt due to fraud.

Can My EDD Overpayments be Discharged in Bankruptcy?

By Ryan C. Wood

If you received a notice from the California Employment Development Department (EDD) with a bill attached indicating you owe money to the state, you are not alone. Many Californians are issued overpayment notices. To add insult to injury, there are plenty of instances where the overpayment is not your fault. The EDD may have simply incorrectly calculated the amount to pay you and now they want their money back – with interest and penalties. It does not matter that the overpayment was not your fault; you may still be penalized for it. So what can you do about this overpayment? It depends on the circumstances of your case. EDD overpayments can be discharged in bankruptcy.

There are a few things you can try first before seeking the advice of a bankruptcy attorney to file bankruptcy and discharge the EDD overpayment. You can appeal the overpayment if it is within the window of time in which you may do so. If it is past the time where you can appeal or you lost the appeal and you do not have any other debts and the EDD overpayment is a manageable amount then you can try to negotiate or work out a payment schedule with the EDD.

Alleged EDD overpayments can be discharged in bankruptcy.

Alleged EDD overpayments can be discharged in bankruptcy.

If you have other debts in addition to the overpayment from the EDD you may consider bankruptcy as an option. You should consult with a bankruptcy lawyer regarding your situation as the answer always depends on your specific circumstances. If you qualify for Chapter 7 bankruptcy the EDD overpayments are dischargeable along with your other general unsecured debts. If you choose to file a Chapter 13 bankruptcy the EDD overpayments will be treated the same as your other general unsecured creditors. Depending upon your circumstances you may not be paying anything back to general unsecured creditors and the alleged EDD overpayment will be discharged upon completion of the Chapter 13 plan. The dischargeability of your EDD overpayments are dependent on whether there was fraud involved in the accrual of the overpayment. If there was allegedly fraud involved the discharge of the EDD overpayments can be denied pursuant to 11 U.S.C. §523 if the California Employment Development Department files an adversary proceeding and proves the overpayment was due to fraud.

California’s Unemployment Insurance Code §2736 states that in the absence of fraud, misrepresentation or willful nondisclosure, EDD must mail the overpayment notification to the recipient of the unemployment benefits within 2 years after the beginning of the benefit period where the overpayment was made. If there is fraud involved California’s Code of Civil Procedure §338(d) provides for a three-year statute of limitations. The clock starts when the cause of action is discovered (or should have been discovered) by the aggrieved party (in this case, the EDD), of the facts constituting the fraud or mistake. If the EDD knew, or should have known, about the facts constituting fraud for more than three years and they did nothing about it then they can no longer go after the recipient. Statutes of limitations are set up so that the aggrieved party can pursue their rights in a timely manner. If they sleep on their rights they will lose them. It goes with the saying, “You snooze, you lose.” There are time limits set up because the longer the time passes, the harder it is to remember detailed information that may help or hinder the case, witnesses may no longer be able to remember or may no longer be present to provide testimony and records may be destroyed. Therefore it is imperative to move on your rights as soon as you know you have been wronged.

If it has been more than three years since the alleged overpayment has occurred and the EDD has not charged you with fraud then they will not be able to bring fraud up as an exception to your bankruptcy discharge should you decide to file for bankruptcy. There are several issues you may want to be aware of when discharging your EDD overpayments in bankruptcy. The first issue is the offsetting of your tax refund. If the EDD has placed a lien and forwarded information to the taxing authorities to have your refund withheld to pay back the overpayment, you want to be sure the overpayments are discharged in bankruptcy prior to your filing your tax returns. If you file your tax returns after your bankruptcy case has started but before receiving a discharge your tax refunds may still be withheld to pay the pre-petition debt (your overpayment). Before filing your tax return you should contact the taxing authorities to verify the debt has been discharged. If it has not, or even if there is a question about it, you should apply for an extension to file your taxes.

Another issue is the recoupment of the overpayment. Recoupment is when the EDD withholds your unemployment benefits to pay the overpayment that is discharged through bankruptcy. They can do this only if you are currently collecting unemployment and you try to discharge the overpayment in your bankruptcy case. The recoupment and the overpayment have to arise from the same action. If you are not on unemployment when you file your bankruptcy case and your overpayment is discharged through bankruptcy, the EDD cannot recoup those funds from you when you apply for the benefits in the future since those debts were discharged in your bankruptcy case and trying to collect on it is a discharge violation. This matter is not settled, however, so you should contact a bankruptcy attorney to discuss your situation.