Category: Bankruptcy Information

Information about bankruptcy, the process, and some of the basics one should to be aware of

time of bankruptcy filing determines homestead exemption

9th Cir: To Avoid a Judgment Lien, Use Exemptions at this Time

9th Circuit: Lien Avoidance Homestead Determined at Time of Bankruptcy Filing

If someone wants to avoid a judgment lien in bankruptcy, is the homestead exemption the one at the time the lien attached, or at the time of the bankruptcy filing? The Ninth Circuit Court of Appeals has recently weighed in, and the answer can affect thousands of dollars of liens on your home.

Why it matters

Liens in bankruptcy don’t usually go away. But there are times we bankruptcy lawyers can reduce or avoid liens. You may have heard that the California homestead exemption got a massive increase in 2021. This protects more home equity than ever before for people filing bankruptcy.

Now couple that with the fact that some liens in bankruptcy can be avoided if they impair an exemption. So, the bigger the exemption, the better the chances you can avoid a judgment lien and make thousands — or tens of thousands — of dollars of judgment liens disappear forever.

It’s very common for bankruptcy attorneys to be asked to remove an old judgment lien from a property. This can be done by reopening an old bankruptcy case where the lien then existed but wasn’t known, or filing a new case if the lien now impairs an exemption. But for a new case on an old lien, given that the homestead law just changed; there can be confusion which timing — and exemption amount — is used.

The question then is: to determine if the judgment lien impairs an exemption (a simple math problem), do we use the puny California homestead exemption at the time of the lien attaching where the lien won’t impair an exemption? Or the massively humongous homestead at the time of filing? It will determine the very question as to whether the lien can be removed in bankruptcy.

The Ninth Circuit, citing the Supreme Court, clarified which timing counts

In the battle of the clock, bankruptcy lawyers fight over which timing to use. The Ninth Circuit Court of Appeals just clarified the answer. It ruled that, “we must look to the amount of the homestead exemption that Boskoski could have claimed if, as Section 522(f) commands, the Greek Village lien against his property is disregarded.” Barclay v. Boskoski, WL 16911862 (9th Cir, Nov. 14, 2022).

In doing so, the Ninth Circuit relied on the U.S Supreme Court case of Owen v Owen, 500 US 305 (Supreme Court, 1991). The Owen case involved a 522(f) lien avoidance issue also. In that case, a judgment was entered against debtor. Creditor then recorded a lien against debtor’s property, and then state law changed to better protect debtor with a homestead exemption.

The Supreme Court ruled, “To determine the application of § 522(f) they ask not whether the lien impairs an exemption to which the debtor is in fact entitled, but whether it impairs an exemption to which he would have been entitled but for the lien itself.” Id. at 310-311. Or put differently, the language of 522f looks to the exemption the debtor would have been entitled but for the judgment lien.

And if there was no “old” judgment lien, the debtor “would be entitled” to today’s (larger) California homestead exemption. And that exemption is large enough where the lien would impair the exemption, and therefore can be avoided by 522(f).

A note about Wolfe v Jacobson

The creditor here, Barclay, argued that the Ninth Circuit was bound by Wolfe v Jacobson, 676 F.3d 1193, 1198 (9th Cir, 2012). It wanted “the entire state law” followed, per Jacobson at 1199. This Jacobson reading would have had the Barclay appellate court “apply all limitations that a state places on its exemptions when conducting the Bankruptcy Code’s lien avoidance calculation—including California’s limitations on the application of its homestead exemption.”

But the Ninth Circuit avoided that, and then pointed back to Owen, quoting the Supreme Court: “the Bankruptcy Code’s policy of permitting state-defined exemptions is not ‘absolute.'” Id. at 313. It found that the Owen case, involving lien avoidance, was a closer match than Jacobson, which doesn’t.

The 9th Circuit continued: “Anticipating the issue we address today, the Court held that ‘it is not inconsistent’ for the Code to allow states to define their own exemptions but ‘to have a policy disfavoring the impingement of certain types of liens upon exemptions, whether federal- or state-created.'”

In doing so, the Ninth Circuit in Barclay distanced itself further from Jacobson. Note that just a few months ago, new California SB1099 law was passed, which contained provisions which some speculate will limit Jacobson in other areas. By going out of its way to distinguish Barclay from it, it seems the Ninth Circuit is eroding the Jacobson holding without overturning it (yet).

The Ninth Circuit Already Ruled on Timing of Exemptions

The In re Barclay ruling is consistent with another case the Ninth Circuit affirmed on a very similar topic.

“It is well-established that the nature and extent of exemptions is determined as of the date that the bankruptcy petition is filed.” In re Chiu, 266 B.R. 743, 751 (9th Cir BAP, 1999), later affirmed, 304 F.3d. 905 (9th Circuit Court of Appeals, 2002), citing White v Stump, 266 U.S. 310, 313 (Supreme Court, 1924).

The Ninth Circuit in Barclay vs Boskoski, without going into much detail, gave a hat tip in passing to Stump above and its “snapshot rule.”

So, everything points in the same direction and lands at the same place. Exemptions are decided at the time of filing, and not the time of the (much) earlier lien attaching. This is consistent with the holdings of the 9th Circuit in Chiu, the Supreme Court in White v Stump, and the Supreme Court in Owen, which got there using different rationale and analysis.

All in all, good news for debtors!

Figuring the Los Angeles Country median home price size is like trying to calculate the median coin weight when all we have is data about stack size

How to Figure the Los Angeles County Median Home Price (2023)

How to Figure the Los Angeles County Median Home Price (2023)

The Los Angeles County median home price in 2022 and 2023 can be tricky to determine. There are different sources that say different things. It’s not clear which of the many options will be relied upon by courts and trustees for the California homestead exemption. Also, while bankruptcy may seem to be “just forms,” make sure you check out my list of 12 crucial tips to do or avoid before filing bankruptcy.

2022-2023 update: there seems to be a consensus among local bankruptcy attorneys as to what the Los Angeles County median home price is. More than that, this L.A. median price changes each year. While it’s still untested in court, a lot of the initial uncertainty has cleared up. Read on!

Warning: This is provided as information only, and is not legal advice. If you are thinking of filing bankruptcy, do not rely upon any information on this webpage. You are assuming all risk and are literally gambling with your home. You will have only yourself to blame if you use the wrong numbers for the Los Angeles County median home value.

See a bankruptcy attorney for more updated information before you file, because there are ways you can lose the exemption.

Average is not Median

los angeles county median home value
The Los Angeles County median home value is not the mean

Before we can determine what the Los Angeles County median home price is, we’ll need to know what it’s not. A median is not the same as the average. This takes us back to high school math, but a quick couple of definitions:

  • Average (or mean): this is where you add up the data, and then divide by the number of data points
  • Median: this is where you list all the data, and then take the number which is at the midpoint

So, as you can see, the median is not the same as the L.A. County average home value.

The Median Changes Over Time

Because the median is the midpoint of all the data, each time there’s another home sale, the median changes and moves. You may figure with a random distribution of data, there would be an equal likelihood that future sales will be about half above and half below the median, keeping the median the same. But home prices change over time and are not static, and particularly during a virus pandemic like the COVID-19 coronavirus we had in 2020 and 2021.

For example, you might find some data sources that list the median home prices for last year, but only through December. Can you assume that houses would sell for the same prices in December around the holidays as they do during the summer when people move a lot and kids are usually out of school?

Read Our Means Test Guide on Median Income Limits.

The Los Angeles County median home price is not the same as that for the L.A. area

Los Angeles County is one of the largest counties in the United States, with over 4,000 square miles. While you may find data for the metropolitan area, that’s very different than the numbers for Los Angeles County. Why? Because L.A County goes from South Bay all the way up to the Antelope Valley and Lancaster. The Los Angeles County median home price is pulling together data from all these.

Los Angeles County is home to about 10,000,000 people, while the city of L.A. has “only” 4,000,000. If you use only city data, you’re missing out on home values in remote areas in LA County like Littlerock and Pearblossom on the 138 and on the way to Vegas.

The Median Home Value is not the same as Median Home Sales Price

You can find some sites which average the values of the homes in the L.A. area, or even Los Angeles County. The problem with that is this: you’re using their own estimate about the Los Angeles county median home values, even those that didn’t sell, when what you’re really needing is the sales price of homes that actually sold.

After reviewing all the above, you can see that we’re looking for a very specific thing here, and no one website reports the Los Angeles County median home price, or has information that in 2022 is depended upon reliably as the “go to” source for Los Angeles County median home value information. Over time, maybe one place will emerge, but for now there’s just a few “almost there” entries.

Some Data Sources Which are Close

which data source can provide the los angeles county median home price
Which of the various data sources is the right one?

With all that being said, you can understand the challenge of finding the Los Angeles County median home price. Most websites are using averages, some have only the L.A. area, and none of them let you have access to the data of all the home sales so you can calculate the median yourself.

Zillow: this company is famous for using its proprietary “Zestimate” to approximate home values. For example, if you go here, you can find what Zillow calls “the typical home value of homes in Los Angeles.”

But that number isn’t clear…. What does “typical” mean – average or median? Remember, they’re different. Home value or home price? There’s no indication this is relying on sales data. And for what time period? Now, at this snapshot in time, last month, this year, or last year?

The website doesn’t say what the Los Angeles County median home price is. It also doesn’t say if it includes single-family homes, is only single-family homes, or something else.

Realtor: This website features real estate, but if you dig down deep enough, you can find market data, research, and trends. It provides data by month, not year, and appears to be providing listing prices, not sales prices.

Redfin: Redfin is another national real estate website, which tracks listings and sales, and helps connect home buyers to realtors. It has market dataand trends, but seems to be restricted to only Los Angeles city, not all of Los Angeles county median home price info.

CAR: The California Association of Realtors also has some market data. But it cautions that the data which it is using comes from over 90 associations and counts “single family detached homes only” and “median price changes may exhibit unusual fluctuation.”

Trulia: Similarly, Trulia is a real estate website that tracks home sales and house prices. It has a way to filter for L.A. and show market information at the bottom of the page, but doesn’t show Los Angeles county median home price or value info. It appears to list home values the way Zillow does, but it doesn’t appear to be relying on sales data.

News reports: You may find news reports from Los Angeles-based newspapers that report data on home sales prices.

how to calculate the inflation-adjusted county median home price
When calculating the inflation-adjusted county median home price, the median coin isn’t the median stack.

Note: you may find some websites that provide spreadsheets of Los Angeles County median home price data, and lists medians by month. Taking the median of the medians isn’t the same as the median of all the sales data. It’s just creating garbage data. To find the true Los Angeles County median, you’d have to have access to all the sales data. This is something very few people have.

And that’s the problem: no one person has the data, and different places which are close report different numbers for the Los Angeles county median home value.

While some of these are close, none of these seem to provide “the” number. Not one can be relied upon, especially for something which involves risking your home.

Summing up the initial Los Angeles County median home price

Is there one bottom line source? Not yet, not until it’s litigated, and honestly, a lot of us in 2021 are trying to sift through all this information to make sense of it. Maybe in the months ahead, one choice will crystalize as the one we all rely upon.

This will likely be after litigation and people guess wrong. Sadly, they will lose their homes in some cases because they guessed wrong on home value. Currently, there is not one number that we can reliably “bet the house” is the median home price in Los Angeles County.

2022-2023 update: with all that said, it is generally agreed upon that the 2021 and initial Los Angeles County median home price is $600,000, adjusted for inflation.

But wait, there’s more!

California homestead exemption, county median price adjusted for inflation

Recall that the California homestead exemption is the county median price adjusted for inflation. So, each year, each county’s exemption amount is different. Section (b) of the new California homestead says:

The amounts specified in this section shall adjust annually for inflation, beginning on January 1, 2022, based on the change in the annual California Consumer Price Index for All Urban Consumers for the prior fiscal year, published by the Department of Industrial Relations.

We don’t know exactly where the county median number comes from, (though the Central District of Calif court seems to endorse CAR but that may or may not be valid evidence in a trustee challenge). Further, the inflation percentage is a different number whose source is similarly mysterious.

Here is how the inflation adjustment of section (b) would work.

The California fiscal year ends in June. Therefore, we take the difference between the old June CPI number and compare it to the most recent new June CPI number. What is that percentage?

CPI and inflation-adjusted California homestead exemption
CPI and inflation-adjusted figures to use in calculating the California homestead exemption, chart from ca.gov showing increases from June 2020 to June 2022

For 2022, the difference between the June 2022 number (297.447) and the June 2021 number (284.835) represents a 4.43% increase. Therefore, for counties capped by statute at the $600,000 maximum, the maximum 2022 median home price and homestead exemption would be $626,566.96. This number will change again in 2023, and “will adjust annually, beginning on January 1, 2022.”

I made a calculator so you can figure out this year’s California homestead exemption amount for any county in California (assuming you have the median sale price number), adjusted for inflation. Better yet, we can calculate next year’s inflation-adjusted homestead exemption if we have June’s CPI numbers already. So bookmark this page and return every few months or so.

Remember, these Calif CPI figures — and the resulting percentage increase — also impact the inflation-adjusted homestead exemption in counties where the minimum was $300,000, or counties in between that and the max, like Riverside and San Bernardino County.

Be cautious, use this information at your own risk, as you’re literally gambling with your (or your client’s) house. Thanks for reading.

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If you’re in Los Angeles County, contact us to request a case evaluation, or go ahead and schedule it for free right now.

wrongful death California community property

Wrongful Death Proceeds and Community Property in California

Wrongful Death Proceeds and Community Property in California

Someone recently asked, “Are wrongful death recovery proceeds community property in California?” The field of bankruptcy crosses over with so many other areas of law. The question stands at the intersection of bankruptcy law, California community property law, and tort law. But the answer to this wrongful death question is critical for bankruptcy lawyers and someone filing bankruptcy in California.

Why it matters if wrongful death claims are community property

This might seem like a tiny point, but it’s really important whether a wrongful death claim or funds are community property or not. There are lots of twists and turns as to whether it affects the other spouse when only one spouse files bankruptcy.

If the money or right to bring a cause of action belongs to only one spouse and not to both, then the other spouse has no ownership interest in the claim, or the cash. Or put more simply: if the money or right to get the money belongs to one spouse as separate property, it doesn’t belong to the other.

With that, if the other spouse files bankruptcy and the claim doesn’t belong to them, then the trustee can’t get to it. If it does belong to them as marital community property, the trustee in a Chapter 7 bankruptcy can take it and repay debts with it. Therefore, it’s crucial to know if it belongs to one spouse, or both.

Yikes. I don’t want the trustee to take my (spouse’s) claim or money.

Exactly. Chapter 7 bankruptcy is called liquidation bankruptcy. This means someone can take your stuff. Many people think, “I don’t have anything.” But there are assets we may have that are more intangible, but are still valuable.

One example of an asset that is intangible would be where someone owes you money. Another would be intellectual property. Yet another would be the right to sue someone. And even more removed, the right of a spouse to sue someone, even if the lawsuit hasn’t been filed yet. Yes, that’s an asset, and could be subject to liquidation in a Chapter 7 bankruptcy.

This is why is why we need to filter a wrongful death claim through the grid of the California community property presumption, and California courts case law that interpret it and how it applies to different kinds of intangible assets over the years.

A look at the law: the statutes and case law

Where does the right to bring a wrongful death claim in Calif come from?

First, a wrongful death — that is, the right to sue for the loss of a loved one — is defined by statute in California law. Civil Procedure Code 377.60 defines the cause of action for wrongful death. It then goes on to say who can bring the cause of action or lawsuit. It includes some obvious relationships like children and surviving spouse. But the statute was recently broadened to include domestic partners.

The California Community Property Presumption

The California community property general presumption from the California Family Code 760 is:

All property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property.

That’s pretty broad. All property. Personal or real. Anywhere. During the marriage. It covers a lot of ground, and doesn’t except a whole lot.

So, if a married person acquires money from wrongful death of a relative, that money sounds like property. When you consider a claim for wrongful death, that sure sounds like a property right, too. Maybe the courts have held otherwise because the loss of a loved one is so personal to the one spouse and possibly not as personal to the other. Let’s take a look.

Wrongful Death California Community Property Court Cases

Starting with Fuentes v Tucker, 31 Cal.2d 1 (Cal Sup Ct, 1947), the California Supreme Court has long held wrongful death recovery proceeds are community property. Later, the California Supreme Court affirmed the rule in Flores v Brown, 39 Cal.2d 622 (Cal Sup Ct, 1952).

The Ninth Circuit Court of Appeals explained it even more clearly. The Court stated, “There is a statutory presumption that property acquired by the spouses during marriage is community property. The presumption is a strong one, which the California Supreme Court has characterized as fundamental to the community property system.”

It continued: “It extends to every conceivable type of property, including insurance policies and their proceeds, a cause of action for the wrongful death of or injury to a minor child; a cause of action for injury to either spouse; a law practice; the interest of a spouse in a partnership; good will of a business; borrowed money; and leasehold interests. Why not to a retained equitable interest in a trust?” (emphasis added, cites omitted). Katz v US, 382 F.2d 723, 728 (9th Cir, 1967).

Given the community property presumption, California Supreme Court case law, and Ninth Circuit Appellate Court rulings, if one spouse files bankruptcy in a community property state, the wrongful death claim of the other spouse would not be separate property. As such, it would have to be disclosed in the bankruptcy, and the money it brings possibly subject to being taken for liquidation by the trustee.

As always, discuss your potential bankruptcy case with a skilled and experienced bankruptcy attorney before filing. While your brother’s wife’s hair stylist’s gardener didn’t lose anything when they filed bankruptcy, you might lose stuff in your case. Each situation is different, and with full disclosure and planning, we can find a solution that fits you.

Chicago v Fulton automatic stay and turnover cases are not just about cars

After Chicago v Fulton: Not Only Cars

After Chicago v Fulton: Not Only Cars

A Survey of Fulton Rulings and a Weakened Automatic Stay

Intro: What is a Fulton ruling?

When Chicago v Fulton (In re Fulton), 141 S Ct. 585 (Sup Ct, 2021) was first decided by the Supreme Court, there was a consensus among bankruptcy attorneys that the erosion of the automatic stay with regard to turnover was only about cars. That is, Fulton was a narrow ruling that was only about impounded vehicles seized prepetition, and wouldn’t really impact or weaken the automatic stay otherwise. Two years on, that turns out not to be the case.

What “Exercise Control” Meant Before Chicago v. Fulton

Prior to Fulton, many courts around the United States held that the filing of a bankruptcy petition compelled a party to return to debtor property taken for the purposes of collections prepetition. This forced return was under the power of the automatic stay of 11 USC 362, specifically section (a)(3). That portion of the statute “stays” or prohibits “any act … to exercise control over property of the estate.” Prior to 2021, it was common for courts to hold that property taken prepetition but held postpetition was “exercising control” of it and in violation of the stay.

Locally here in the Ninth Circuit, an example of a pre-Fulton exercise control case was In re Del Mission Ltd., 98 F.3d 1147 (9th Cir, 1996). There, the appellate court held, “we conclude that the State’s knowing retention of the disputed taxes violated the automatic stay.” Id. at 1152. After Fulton, Del Mission is no longer good law.

A Chicago v Fulton battle over automatic stay and turnover
A Chicago v Fulton battle over automatic stay and turnover

What SCOTUS Ruled in Chicago v. Fulton

Fulton reversed the law of many courts, including here in the Ninth Circuit. The Supreme Court held that “mere retention of estate property after the filing of a bankruptcy petition does not violate § 362(a)(3) of the Bankruptcy Code.” Id. at 592. It ruled that it to be a stay violation, it would take “affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed.” Merely holding onto something doesn’t do that.

Deep Dive on the Automatic Stay

What is a post-Fulton case or Fulton ruling

The Chicago v Fulton case was about the city of Chicago seizing and impounding vehicles prepetition for motor vehicle infractions and to collect fines, then refusing to turn over the vehicle upon the bankruptcy filing per 362(a)(3). Post-Fulton, courts are now finding that any property, not just a car, seized prepetition can be “merely retained” without finding a violation of the automatic stay. Two years later, this is a quick survey to see how courts are ruling on this issue now.

First Circuit

Milk. In re Vaqueria Las Martas, 638 BR 482 (1st Cir BAP, 2022). Not a typical automatic stay and turnover case, this Chapter 12 involves a loan for a couple of million dollars secured by thousands of gallons of milk. Fulton came into the picture because of the reference in it to filing an adversary proceeding for turnover under Section 542. Interestingly, at page 499, the 1st Circuit BAP found that the Supreme Court in Fulton “decided the issue narrowly,” but it was referring to the turnover process, not the Fulton ruling itself.

Bank accounts – “beyond the status quo” In re Educational Technical College, Case No. 21-02392 (EAG) (Bankr Ct, Puerto Rico, 2022). Here, the bankruptcy court found that the allegations against creditor rise above the level set in Fulton and Stuart (discussed below) when it misled debtor, took contradictory positions, used vexatious litigation tactics, and delayed things unnecessarily.

Second Circuit

No cases found yet.

Third Circuit

Bank accounts. In re Margavitch, Case No. 5:19-05353-MJC (Bankr Ct, MD Penn, 2021). Margavitch was one of the first turnover rulings on the issue to come out after Chicago v. Fulton was decided. It involved a pre-petition attachment lien, and the creditor took no action to withdraw it once the case was filed. The Court held, citing Fulton, that a stay violation requires an affirmative act that disrupts the status quo of estate property on the date the petition was filed. Further, the Margavitch court ruled, “passive maintenance of its valid pre-petition attachment lien in no way changed the status quo and therefore, did not constitute a violation of §362(a)(2).”

Bank accounts. In re Kipps, Case No. 5:19-01662-MJC, (Bankr Ct, MD Penn, 2022). The same judge who decided Margavitch decides another bank account case, and reaches the same conclusion.

Fourth Circuit

No cases found yet.

Fifth Circuit

No cases found yet.

Sixth Circuit

No cases found yet.

Seventh Circuit

No cases found yet.

Eighth Circuit

No cases found yet.

Ninth Circuit

Bank accounts. Stuart vs City of Scottsdale (in re Stuart), 632 BR 531 (9th Cir BAP, 2021). Here, Bank of America froze three bank accounts of debtor before he filed bankruptcy. Upon filing, the bank refused to release the frozen funds. The Ninth Circuit BAP held, “Where a creditor has executed a prepetition writ of garnishment against a debtor’s bank account, it is under no affirmative obligation to release the funds and need only maintain the status quo.” Id. at 540. “Because the City immediately asked the state court to stay the case and did nothing to change the status quo that existed when Mr. Stuart filed his bankruptcy petition, it did not violate the automatic stay.” Id. at 544.

Entering a Court Order. In re Censo, 638 BR 416 (9th Cir BAP, 2022). The Ninth Circuit BAP goes one step further. In Censo, there was a pre-petition lien, and so this seems to be the normal fact pattern. What’s different here is that there was a summary judgment order regarding the lien that was granted postpetition. The 9th Cir BAP found that the order did not change the status quo: “Shellpoint’s lien existed as of the petition date, and the DC Order simply affirmed the validity of the existing lien. It did not affect KAH’s possession or control of the Property. The DC Order thus did not disturb the status quo and did not violate § 362(a)(3).” Id. at 425. The automatic stay provision of 362(a)(1) bars actions against debtor. In Censo, the BAP’s found the “automatic stay inapplicable to lawsuits initiated by the debtor, and a defendant in an action brought by the debtor may defend itself in that action without violating the automatic stay.” Id. at 424.

Court action taken in defense. In re Lee, Case No. 13-11850-gs (Bankr Ct, Nevada, 2022). Debtors reopened their fourth bankruptcy case, which was previously dismissed, to file lawsuits. In response, the creditor brought a motion, and the bankruptcy court ruled, citing Censo, that the automatic stay doesn’t apply to state court actions commenced by the debtors.

Withholding a passport. In re Bronson, Case No. 20-30704-thp11 (Bankr Ct Oregon, 2022). In this case, there were allegations that creditor withheld debtor’s passport to collect unpaid child support. The bankruptcy court addressed the issue as to whether a stay violation occurred regarding the passport, but found there was not enough factual evidence to make a ruling.

Tenth Circuit

No cases found yet.

Eleventh Circuit

Beyond the status quo: Car seized prepetition but then sold postpetition is a stay violation. In re Rakestraw, Case No. 22-40960-PWB, (Bankr Ct, ND Georgia, 2022). “Although a creditor’s retention of a vehicle repossessed prepetition does not violate the provisions of the automatic stay in 11 U.S.C. § 362(a)(3), the automatic stay in § 362(a)(4) prohibits the enforcement of a lien against property of the estate. Accordingly, the alleged postpetition sale of the Vehicle to enforce the lien violated the automatic stay.”

Summary of turnover cases after Chicago v Fulton

Post-Fulton rulings and jurisprudence are still on the thin side two years later. However, it is clear that the Chicago v Fulton holding applies far beyond motor vehicles. In fact, most rulings citing Fulton had nothing to do with cars and trucks.

If you know if a case that belongs on this list, please share it on the following form. Thank you.

    Can one person file bankruptcy separately

    One Spouse Filing Bankruptcy: Everything You Need to Know

    One Spouse Filing Bankruptcy

    All you need to know about one spouse filing bankruptcy individually or separately

    Can one spouse file bankruptcy without the other?

    Can one spouse file bankruptcy without the other? In consultations, that’s one question I get asked a lot. When we’re married in California, everything is presumed to be joined and shared. So, can a married person claim a bankruptcy? The answer is, “Yes.” Even though someone is married, they have every right to file bankruptcy without the other spouse. They have their own Social Security number and their own credit history. But just because you can do something doesn’t mean you should.

    I’m a bankruptcy attorney practicing in Los Angeles County in California, which is a community property state. All of the information here is specific to California. If you are in a different state, even if it’s community property, this information may not apply, and you should find a bankruptcy lawyer near you. Consult with your bankruptcy lawyer or if you’re in the greater Los Angeles county area, contact me for a consultation.

    If I file bankruptcy individually without my spouse, do I include their finances?

    Yes, in California, a community property state. A debtor needs to disclose all of their assets, and those of the community. 11 USC 541(a)(2). When we get married and say “I do” here, there is a general presumption that every asset or dollar acquired by either person is community property and belongs to both. Calif Family Code 760.

    So regardless of whose name is on the paycheck, bank account, or monster truck, the general marital community property presumption says that if it was acquired during the marriage, it belongs to you both (even a personal injury or wrongful death claim). And when one spouse files bankruptcy, he or she must list the income, stuff, and financial data of the other spouse. For this reason, this factor is no advantage for only one to file, as all the info comes in either way.

    Do I have to list the debts of my spouse if I file bankruptcy separately?

    Family Code Section 910 says, “…the community estate is liable for a debt incurred by either spouse before or during marriage, regardless of which spouse has the management and control of the property and regardless of whether one or both spouses are parties to the debt or to a judgment for the debt.” California FC Section 914(a): “..a married person is personally liable for the following debts incurred by the person’s spouse during marriage: A debt incurred for necessaries of life of the person’s spouse before the date of separation of the spouses.”

    Given that, if you are liable for a debt, it is your debt. The bankruptcy petition tells you to list all your debts. Including those of your husband or wife. The bankruptcy trustee will ask if the papers list all of your debts. You must list all debts you are liable for, and that would include those of your spouse in California. Ask your bankruptcy attorney for more on your specific situation.

    If my spouse files bankruptcy, will it affect me?

    “Will filing Chapter 7 bankruptcy affect my spouse?” This question understandably comes up a lot. Affect is such a broad word. It’s almost certain that the bankruptcy will affect the spouse, though how varies from case to case. It may affect the spouse if it’s a Chapter 13 and the community income — that is both pay checks — are used to fund the debt consolidation. It might affect the spouse emotionally.

    Embed from Getty Images

    It could affect the spouse that their debts should be included in the bankruptcy even though the spouse isn’t filing, and affect the credit of the spouse, and the accounts are closed even though they’re being paid on time.

    If you file bankruptcy and your spouse doesn’t, I won’t need their Social Security number or their signature on anything. While I’m happy to meet them, if they truly don’t want to be involved, they need not attend any consultations or court hearings. However, as their financial information is included because of the community property presumption, it will likely affect the spouse in some way.

    Is there a benefit to me if my spouse files bankruptcy and I don’t?

    There are pros and cons to weigh and assess when trying to decide if only one or both spouses should file. There are benefits. Yes, because one spouse can file bankruptcy for both, that’s a benefit. If your spouse files bankruptcy and you don’t, there is one obvious benefit to you: you don’t have a bankruptcy on your credit report. Their bankruptcy should be eliminating your eligible debts also as nonfiling spouse, and the effect is to discharge the debts of both spouses, husband and wife, even though only one person filed. It can be a two-for-the-price-of-one transaction.

    Will filing bankruptcy hurt the credit of the nonfiling spouse?

    Yes. While the married person not filing (fancy term: non-filing spouse) won’t have a bankruptcy on their credit report, their debts should be in the bankruptcy. And when debts are in a bankruptcy, the accounts are typically closed, and reported negatively to Experian, Trans Union and Equifax credit reports. Not “bankruptcy” bad, but still, it should result in derogatory marks on their credit report since the accounts are no longer paid “as agreed.”

    My spouse is disabled, unavailable, or isn’t capable of testifying. Can I sign or testify for my spouse in my bankruptcy?

    Not without something more. Whoever files bankruptcy has to testify as to the truthfulness of the papers. This is done in two ways: one in signing the papers under penalty of perjury, and a second time at the 341(a) meeting of creditors. If your spouse is physically not available, or mentally or cognitively unable to testify, you cannot testify for them, without some additional permission and evidence.

    Can I use a power of attorney to file bankruptcy for someone else?

    The ability to use a power of attorney for a bankruptcy can vary by jurisdiction and is subject to local rules and practice. For example, some courts allow Power of Attorney. United States v Spurlin, 664 F. 3d 954, 959 (5th Cir. 2011), but see also locally here In re Foster, 2012 WL 6554718 (9th Cir. BAP 2012), which says a POA cannot be used in lieu of signature on a pro se complaint as it is construed as practicing law without a license.

    There’s a possible solution where you get court permission to represent your spouse or someone else. In the Central District of California, this is called a “next friend.” FRBP 1004.1 says a bankruptcy court will recognize a personal representative appointed by another court or the bankruptcy court has authority to appoint a next friend. The standard is that petitioner is unable to litigate his own cause due to mental incapacity and the next friend must have significant relationship with and is truly dedicated to the best interests of the petitioner. Coal. of Clergy, Lawyers, & Professors v Bush, 310 F. 3d 1153 (9th Cir. 2002). There are various types of evidence that may be used to show incapacity. AT&T Mobility v Yeager, 2015 WL 6951291, at 5-6 (E.D. Cal. 2015). This will incur extra work and legal fees, and may not always be necessary.

    If one spouse files bankruptcy, does the other spouse get bankruptcy protection?

    As usual in law… it depends. Chapter 13 bankruptcy is special in that it has something called a co-debtor stay of Section 1301. Both spouses are liable on the debts of the marriage, regardless who who incurred it or manages the finances. Family Code 910. So, both spouses are typically liable for all debts. This means that if you file bankruptcy and your spouse doesn’t, that they’re still protected by the codebtor stay if only one of you files Chapter 13.

    Great, but is there bankruptcy protection if only one spouse files Chapter 7?

    Yes, but not for the nonfiling spouse. Chapter 7 bankruptcy only protects the person or people who filed. And spouses in California, while they are liable on debts incurred during the marriage, are not protected by the automatic stay if they don’t sign the petition and schedules and file bankruptcy. However, once the filing spouse gets a discharge, their property cannot be collected against or it’s a discharge violation.

    So, most creditors don’t collect against the nonfiling spouse, since their assets are the same assets as the person who filed and got the discharge. But beware: Family Code 914 says that the separate property of the nonfiling spouse can be collected on, if they have any (most don’t).

    In most Chapter 7 cases, the creditors don’t collect against the other spouse where one files, but are allowed to, even give them a lawsuit. They just can’t use the judgment from a lawsuit to touch community property assets. As that usually is everything, most collectors don’t bother. But they can.

    As you weigh pros and cons, what is the benefit of certainty in Chapter 7 of both parties being absolutely protected from creditor calls and collections worth? If it’s a lot, is it “bankruptcy on your credit report” a lot? Talk with your bankruptcy attorney. There may be other variables in your unique circumstances.

    Can a lien be placed on my house for my spouse’s debts?

    Generally, yes. Because of the Calif Family Code sections above, both spouses (and their assets) are liable for the debts of the other in a marriage. So, if Spouse A got a big credit card debt, there could be a credit card lawsuit resulting in judgment. A judgment lien can then be attached against the asset which Spouse B also owns (typically community property acquired during the marriage in Calif). Filing bankruptcy and getting the automatic stay would stop the lawsuit, and protect that community asset. 11 USC 541(a)(2)(B).

    Can they garnish my paycheck for my spouse’s debts?

    Again, yes. See above. Both spouses — and their community assets — are liable for debts incurred during the marriage under the California Family Code. A paycheck belongs to both spouses, regardless of whose name is on it. There is also the issue if one innocent spouse can be liable for the fraud of the other. So the general answer is, yes, they can garnish your paycheck for the debts of your spouse, and vice verse.

    Summing up

    The intersection of bankruptcy law and community property confuses many people, including attorneys in California. There is not always one best answer to the question, “is it better for us both to file bankruptcy jointly together, or just one spouse separately.” Is it possible to file individually? Yes. What’s best for you and your unique circumstances? Contact me or set up a free Zoom consultation with the link at the top of this page and let’s go over it together. Thanks for reading.

    The 1215-day rule is unsettled about residency vs ownership in California

    1215-day rule: Is Residency Needed, or Merely Ownership in Calif

    1215-day rule: Is Residency Needed, or Merely Ownership in California?

    A look at how closing the Mansion Loophole could lose your home in bankruptcy

    Does the 1215-day rule for the homestead require occupancy as a domicile, or merely ownership? This is a new issue here for bankruptcy attorneys in California. It matters to you, too, if you own a home in California and are thinking of filing bankruptcy. This is because the homestead exemption amount until 1/2021 was always below the 522 number. Let’s break this apart in plain English a little bit so we can understand what’s at stake.

    New California Homestead Exemption and the Mansion Loophole

    Homestead Increased in California

    As you may have heard, the California homestead exemption increased recently. For years, it protected a maximum of $100,000 in home equity for a typical married couple. Suddenly in 2021, the California homestead was increased to a minimum of $300,000, and probably more than that where you live.

    Great news, right? But there’s a catch. Well a few catches. But let’s focus on just one: the mansion loophole.

    The Mansion Loophole, Federal Exemptions, and 522(p)

    What is the Mansion Loophole?

    What is the mansion loophole, you ask? It’s the kind of concept that allowed OJ Simpson to go buy a big fancy house in Florida and then move to that state and immediately exempt tons of equity in that home so that his creditors couldn’t get their hands on it.

    Congress decided that’s not fair to parachute in and just take advantage of a state’s generous exemptions. Or for scoundrels such as Enron executives like Kenneth Lay to shield millions in equity after harming so many people. To benefit from a state’s laws and protections, Congress said you need to acquire the property for a period beforehand, and not merely a domicile.

    The Federal Exemptions, 1215 days, and 522(p)

    Federal exemptions are bankruptcy protections available in some states, and fallback numbers for other states. They are figures published and updated by the federal government. The federal exemptions increase periodically. The 1215-day number used in here is valid for 2022, but may adjust in the future.

    Which brings us to 11 USC 522(p).

    to exempt property under State or local law, a debtor may not exempt any amount of interest that was acquired by the debtor during the 1215-day period preceding the date of the filing of the petition that exceeds in the aggregate $125,000 in value in—
    (A) real or personal property that the debtor or a dependent of the debtor uses as a residence;
    (B) a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence;
    (C) a burial plot for the debtor or a dependent of the debtor; or
    (D) real or personal property that the debtor or dependent of the debtor claims as a homestead.

    The gist of all that is that you need to have acquired an interest in the property over 1215 days prior to claiming the homestead exemption for it. OJ would now need to wait over three years after acquiring the property before his assets would be safe from creditors. Mansion loophole closed.

    The 1215-day rule is unsettled about residency vs ownership in California bankruptcy law
    Joyful household members establishing their domicile in an effort to comply with 522(p)

    Why this matters

    “Great,” you say, “but what does this have to do with me?”

    This means that if you file bankruptcy and you have a house, you don’t get the gargantuan California homestead exemption of a minimum of $300,000 if you acquired the interest in the last three years. You lose it, and “only” get the federal homestead exemption of $189,050.

    Maybe that’s enough. Maybe you lose your home in bankruptcy. The 1215 days matter to debtors in California. It can make the difference between keeping your house in Chapter 7 bankruptcy, or losing it.

    They never used to matter. Why? Because before 2021, we could never “lose” the exemption down to $189,050. This is because we were already capped at $100,000. The 522 limitations were never a factor in California. Until now. Suddenly, a $600,000 homestead can be slashed to less than a third. It matters that all of 11 USC 522 is paid attention to very closely now for California bankruptcy lawyers.

    But wait, there’s more.

    1215 days: Ownership or Residency?

    The issue

    Do you have to live in the place for 1215 days, or just own it? Let’s say you have a rental property in Santa Barbara which you acquired and have owned for over four years. It’s had renters living in it while you live elsewhere, and you’ve had title all that time. Then a month before you file bankruptcy, the renters leave and you move in. You live there a month, but have owned it for over 1215 days. Do you get the big massive California homestead exemption, or the shrimpy 522(p) reduction?

    It’s not as clear as you might think.

    Looking back at 11 USC 522(p), the words “amount” and “interest” and “acquire” are not defined in the Bankruptcy Code. So, like most things in life, it’s settled in court.

    The Ninth Circuit ruling on the 1215-day rule

    The Greene Case Looks Like a Win

    The issue was looked at by the Ninth Circuit Court of Appeals in 2009 (in the context of Nevada state law and its exemption). There, the 9th Circuit ruled:

    We hold that “any amount of interest that was acquired,” as used in Section 522(p)(1), means the acquisition of ownership of real property and that the monetary cap in Section 522(p) does not apply to property to which a debtor acquired title more than 1215 days before she or he filed a bankruptcy petition. That language does not include a homestead claim for the underlying property interest, which claim was recorded within the 1215-day period.

    In re Greene, 583 F.3d. 614, 624 (9th Cir, 2009).

    Boiling all that legal jargon down, the Ninth Circuit is saying that the smaller cap of 522(p) doesn’t apply if the acquisition of ownership of the property was more than 1215 days ago. The 9th Circuit Court of Appeals ruled that it can’t limit a homestead property interest that started in the 1215-days period.

    Or more simply, the court in Greene said that as long as ownership is more than 1215 days, the shorter homestead doesn’t matter. But remember, it was ruling on Nevada law and its exemptions.

    But The State Law Must be Interpreted

    Before we celebrate here in California, note that there’s a way this may not be applied here. In other words, state law must be looked at, and each state has its own meaning and reasoning for its homestead exemptions. Is it intended to create a property interest? Or is it just privileges?

    The 9th Circuit reached the Greene ruling after a review of state law (both Nevada and Texas) regarding the purpose of the exemption, and concluded that Nevada exemption law created a property interest, and not merely exemptions and privileges. (Id. at 621-622, citing the review of Texas in In re Rogers, 513 F.3d. 212, 225 (5th Cir, 2008).

    But What About California’s Homestead Exemption: Privilege or Property Right?

    In California, remember, this is all new because the 1215-day cap of 522p never mattered before 2021. The 9th Circuit has not ruled on this recently, that I’m aware of, in the context of California’s homestead exemption.

    However, a long time ago, when Pat Brown was governor, it did rule on the issue, in a case which would distinguish it from Greene and Rogers. The Ninth Circuit Court of Appeals ruled that California’s homestead laws do not create property rights, but merely exemptions.

    “…the California state courts have repeatedly held that the filing of a homestead declaration in that state creates merely a privilege or exemption attached to but not otherwise affecting title.”

    Shaw v United States, 331 F.2d. 493, 497 (9th Cir, 1964).

    That would distinguish it from the good news of the Greene case, and means that you have to live there for the 1215 days to get the California homestead exemption, even if you owned it for over four years.

    In closing

    Best I can tell, Shaw is still good law, at least until someone tests it in the years to come. This means the safe bet is residency is required for 1215 days at the property to “acquire” it, and not merely ownership.

    Perhaps with the new broadening of the homestead exemption in 2021 and the importance it underscores, the 9th Circuit may now reach a different conclusion, but it’s not something I’d knowingly bet a client’s house on.

    California Homestead and Reside Away from Home and State presents challenges

    California Homestead: Intent to Reside and the Out-of-State Home

    California Homestead: Intent to Reside and the Out-of-State Home

    A bankruptcy attorney colleague recently asked, does the California homestead exemption protect you if you don’t reside in the house? Are you required to live in the home? For how long? Who qualifies? Does the homestead exemption protect the home if the house isn’t in California? The answer, like most things in law, is: “it depends.”

    Dual residency in two states and and claim homestead in both?

    No, there is no dual residency in multiple states for the purposes of homestead. As you’ll read below, a homestead is the place in which you primarily live. You can’t primarily live in two places. So, the determination is where you primarily reside, which state law applies, and is the house protected by the California homestead exemption.

    Let’s look at these “away from home” situations one at a time.

    The California homestead and intent to reside

    california homestead away from home
    California homestead is challenged if away from home, and the intent to actually live there is unclear

    First, can someone claim the California homestead exemption if they live in the house on the date the petition is filed, but move out after? What if they move out after the Chapter 7 bankruptcy is filed, but it’s just a temporary relocation? Or what if the debtor who filed bankruptcy really has no intention to return?

    The result is very fact-specific, and has had bankruptcy courts and appellate courts carefully examining the particulars for the debtor before filed, on the date the case was filed, and then after the case was filed. Let’s review a few significant cases in the Ninth Circuit to see how the courts have ruled.

    Not residing in the house on date of filing

    First, let’s look at the case of Andy Diaz. He owned and lived at a home in Orange County, Calif. He then suffered two brain aneurysms. Those required many surgeries, and left Mr. Diaz in a coma. After weeks, he awoke from the coma, but couldn’t walk or speak, and the symptoms were similar to a stroke.

    Mr. Diaz got better, and to rehabilitate, moved into his mother’s house, which was across the street from his own home, six houses down. Diaz then filed bankruptcy, claiming the homestead exemption in his home where he wasn’t living.

    The Chapter 7 trustee challenged, and won in bankruptcy court. Diaz appealed. Nobody disputed that the debtor didn’t live in the house when the bankruptcy was filed.

    The 9th Circuit Bankruptcy Appellate Panel (BAP) ruled that, “California courts have long held that a lack of physical occupancy does not preclude a party from establishing actual residency and claiming the homestead, if the claimant intends to return.” In re Diaz, 547 BR 329, 335 (9th Cir BAP, 2016). It went on: “Physical occupancy on the petition date is therefore neither a necessary nor sufficient condition of residency.” Id. at 336.

    Residing in the home at filing, but intent to move

    Next, let’s look at the case of Kevin Gilman. He did live in his house on the date of filing. Residency established, slam dunk on the homestead exemption, right? Not so fast.

    Not an actual photo of Gilman on the date of his bankruptcy petition was filed and the home in escrow

    It turns out that Mr. Gilman also had his home in escrow at the time of filing. Creditor challenged. The bankruptcy court agreed with the debtor. The creditor appealed.

    The appellate court found that, unlike Diaz, it was undisputed that Mr. Gilman had occupancy of the premises, and was a continuous resident of the property.

    However, it also ruled: “To determine whether a debtor resides in a property for homestead purposes, courts consider the debtor’s physical occupancy of the property and the intent to reside there.” In re Gilman, 887 F.3d 956, 965 (9th Cir, 2018).

    It then cited the case of Mr. Diaz when it wrote: “Physical occupancy on the filing date without the requisite intent to live there, is not sufficient to establish residency.” Gilman at 966, citing Diaz at 336.

    After all that, the bottom line after Gilman to successfully claim a California homestead exemption is that, among other things, regardless of where the debtor lives on the date the bankruptcy petition is filed, there has to be evidence to show that the debtor intends to live at the residence.

    california homestead residence intent extraterritorial
    California homestead exemption is dependent if you’re moving away from home, or just going for a temporary walk

    Intent to reside but only equitable interest

    What if the person filing bankruptcy claiming the homestead exemption in California doesn’t even have title to the house? That brings up the case of Steve Nolan. There, Mr. Nolan claimed an exemption for a property in Corona, California. Like Gilman, he lived at the property, and intended to continue living there. Unlike Gilman or Diaz, he didn’t have legal title to the house.

    Instead, he was both trustee and partial beneficiary of a trust, which held title to the property. The bankruptcy court ruled that Mr. Nolan did not have an interest in the property subject to an enforcement lien and not even bare legal title.

    However, because he was 50% beneficiary of the trust, that portion is property of the estate per 11 USC 541(a)(1) and (c)(2). The Court then reviewed applicable case law that allows homesteading based on an equitable interest, and ruled in debtor’s favor. In re Nolan, 618 BR 860 (Bankr Ct CDCA 2020).

    The California homestead exemption for the out-of-state house

    Occupancy, future intent, but home outside California

    Next, we ask if someone claim a California homestead exemption if the California debtor lives in the house, intends to reside there so it’s his residence and domicile, but the house isn’t in California? The Ninth Circuit Court of Appeals considered this and ruled: yes.

    This is the case of Robert Arrol. He bought a house in Michigan. Then, without selling that home, he moved to California for two years. He then moved back to his Michigan house, and within 90 days of moving, he filed bankruptcy in California.

    He used California’s homestead exemption to protect his Michigan residence. You guessed it: the bankruptcy trustee objected to the homestead exemption. The bankruptcy court ruled in favor of Mr. Arrol, and the trustee appealed, and lost again. The trustee appealed yet again, this time to the Ninth Circuit.

    The Ninth Circuit’s ruling on an out-of-state California homestead

    The appellate court examined 11 USC 522(b)(2)(A), which pointed to state exemption law. Given that Mr. Arrol lived in California for the greater part of 180 days before filing, California law applied. Looking at CCP 704.730 and 704.710(c), the appellate court determined whether the state law allowed this. The Ninth Circuit found that California state law didn’t limit the homestead exemption to dwellings in California, and concluded,

    We find nothing in the California exemption statutory scheme, its legislative history, or its interpretation in California case law to limit the application of the homestead exemption to dwellings within California.

    In re Arrol, 170 F3d 934, 937 (9th Cir, 1999).

    California homestead exemption for out-of-state property with no intent

    Mike Showalter owned an interest in a Florida house. He had lived at the Florida property for some time over decades. For the twelve years prior to filing bankruptcy, he lived in California in a rental property. After filing bankruptcy, he moved to a different rental property in California. A month before filing bankruptcy, while living in California, he signed a declaration that the Florida house is his principal dwelling, and it’s his homestead.

    The appellate court determined that the declaration was “patently untrue” and by Mr Showalter’s own testimony, he hadn’t lived at the Florida property for about twenty years, he didn’t live in Florida, and no credible intention to return to live at the Florida property, and the claim of California homestead is invalid. In re Showalter, (12-22720, 9th Cir BAP, 2013).

    Residency and the California Homestead: Piecing it all together

    As of this writing, it seems the current law on the California homestead exemption for a home where you maybe don’t live which may be in a different state is the following. You can claim the California homestead exemption if it’s your residence, California law applies, and you intend to live in that residence as your future home, even if it’s not in California.

    sell home chapter 13

    Sell a Home in Chapter 13 Bankruptcy: Motion to Sell or Refi

    Sell a Home in Chapter 13 Bankruptcy: Motion to Sell or Refi

    My clients ask me, “can I sell a home in a Chapter 13 bankruptcy?” As a bankruptcy attorney experienced in Chapter 13, selling a house is an issue that comes up often, particularly in a robust housing market. This is written without giving advice to the specifics of your case, but merely addressing whether it’s possible to sell or refinance a house during Chapter 13.

    The answer is “yes… but.” It’s not always in your best interests to sell a home in Chapter 13, and you really should consult on this with your bankruptcy lawyer, as facts vary depending on judicial circuit, state, local practice, and your particular case and its Order Confirming. As I’m a Los Angeles bankruptcy attorney, I’ll be focusing on practice in the Central District of California here in the Ninth Circuit, so the following may not apply to you if you’re elsewhere.

    Can I move during a Chapter 13 bankruptcy?

    Let’s start with the basic question of whether you’re allowed to move and change residence during the term of a Chapter 13. The answer is, “Yes.” There is nothing in a bankruptcy that prevents you from moving, or even changing states. You are free to move about the country.

    As leaving the state would likely mean you’re now working out-of-state from where the case was filed, you will almost certainly want to update your Schedules with your new employer, income and expenses, and this may potentially affect your plan payment, and the percentage of debt which you’re paying the general unsecured creditors. And that may turn into a Motion to Modify (MoMod) being filed with the court, leading to new legal fees.

    Motion to Sell or Refinance in Chapter 13

    A Motion to Sell or Refinance in Chapter 13 is where you ask the judge permission to sell or refinance your home. So, yes, you can sell or refi in Chapter 13. Whether it’s a smart decision or not will vary based on the circuit, district, and even your particular case, and you’ll want to seek advice with your bankruptcy lawyer.

    Chapter 13 can pay only a fraction of your debts. But that can trigger a couple of things that lead to it getting fed more money. If you’re paying less than 100% of the general unsecured creditors, sometimes you don’t get to keep tax refunds in Chapter 13. Similarly, when there is a ton of extra money from a home sale or refi, that too can lead to more debt getting paid.

    Revesting of the Estate and Form Plans

    Revesting

    One factor as to whether you should sell a home in Chapter 13 (or refinance in your Chapter 13 bankruptcy) depends on whether the estate revests at confirmation or at discharge. That’s all a fancy way of saying, “when does the ownership and control of your stuff — including your home — return to you, the debtor?”

    In bankruptcy, here’s the crux of the matter: when you sell or refinance in a Chapter 13, do you have to use the sale proceeds to pay all of your general unsecured debt, or all of the part you are intending to pay during the bankruptcy? Remember, Chapter 13 bankruptcy doesn’t necessarily pay all your debt. If a Chapter 13 is only paying a fraction of the credit cards, how much of the credit cards get paid by the proceeds of the house or other sale?

    A recent case on postpetition equity

    The issue as to whether you can sell in a Chapter 13 and who gets the proceeds was recently seen in Colorado, when the Chapter 13 trustee fought to get the postpetition appreciation of an LLC. In re Klein, WL 3902822 (Bankr. D. Colo. 2022). The trustee argued that proceeds were postpetition property under Section 1306 (nothing about 541a6). However, debtor argued that Section 1327 says that property vests in the debtor at confirmation, unless provided otherwise in the plan. The two sides fought about the tension between 1306 vs 1327. Ultimately, the Court concluded that 1327 was more specific and the proceeds belonged to Debtor.

    What about Section 1322(b)(9)? That says the plan may “provide for the vesting of property of the estate, on confirmation of the plan or at a later time, in the debtor or in any other entity.” That “may” (coupled with 1327b) also indicates that it may not.

    More on that later.

    This is the Tenth Circuit. What about here in the Ninth Circuit?

    Black vs Leavitt (In re Black)

    Glad you asked. That’s the issue the Ninth Circuit Bankruptcy Appellate Panel faced in 2019 in Black vs Leavitt (In re Black), 609 B.R. 518 (9th Circuit BAP, 2019). There, the BAP decided that when someone tried to sell a home in a Chapter 13 (actually, a rental property), the property — and the proceeds — were the debtor’s to do as he wanted.

    In our view, the revesting provision of the confirmed plan means that the debtor owns the property outright and that the debtor is entitled to any postpetition appreciation. When the bankruptcy court confirmed Mr. Black’s plan, the Property revested in Mr. Black. See In re Jones, 420 B.R. at 515. As such, it was no longer property of the estate, so the appreciation did not accrue from estate property.

    Id. at 529.

    Great news, right? Not so fast. There’s some key language in footnote 9 of the same case. There, the 9th Cir BAP wrote:

    If the plan did not vest the Property in Mr. Black, the result would likely be different. See Klein v. Chappell (In re Chappell), 373 B.R. 73, 83 (9th Cir. BAP 2007), aff’d sub nom. Gebhart v. Gaughan (In re Gebhart), 621 F.3d 1206 (9th Cir. 2010) (In a chapter 7 case, where property does not revest in the debtor, “[u]nder well-settled Ninth Circuit law, any postpetition appreciation in value in the residence in excess of the maximum amount permitted by the exemption statute invoked inures to the benefit of the estate.”); § 541(a)(6) (a bankruptcy estate includes “[p]roceeds, product, offspring, rents, or profits of or from property of the estate ….”).

    Clearly, the issue of who gets the sale proceeds is determined by what the Chapter 13 plan says. It’s important to know this crucial fact before asking your bankruptcy attorney to submit a motion to sell or motion to refinance real property.

    In re Berkley

    In one case, the debtor was repaying one percent (1%) of his unsecured debt. The plan said the estate revests at confirmation. After the case was confirmed, he started getting stock options. At month 57 of his plan, he sold his postconfirmation stock options for $3.8 million. Trustee filed a motion to modify for some of the sale proceeds. The Ninth Circuit BAP held that Section 1329 and a modification allows for change of circumstances, and the millions of dollars means that debtor can repay his debts.

    The 9th Circuit BAP acknowledged that the estate terminated at confirmation, citing 9th Circuit precedent of In re Jones, 420 BR 506 (9th Cir BAP 2009), aff’d by 9th Cir in 657 F3d 921 (9th Cir, 2011). In Jones, the Ninth Circuit adopted the “estate-termination approach.” This approach is where the estate ceases to exist at confirmation. In the estate termination approach, all property then becomes property of the debtor, whether acquired before or after confirmation.

    The Berkley BAP then nodded at its own recent ruling in the matter of In re Black (above).

    However, the BAP then held that “[u]nder § 1329, the bankruptcy court can approve a plan modification that increases the debtor’s plan payments due to a postconfirmation increase in the debtor’s income, whether or not the additional income is property of the estate.” In re Berkley, 613 BR 547, 553 (9th Cir BAP, 2020). It distinguished Black and Jones from the instant case, as it is solely concerned with postpetition wages.

    Central District Form Plan

    Whether the estate revests at confirmation or at discharge is a key determining factor about who gets the sale proceeds of postpetition appreciation from a prepetition asset. So what does the form plan say here in Los Angeles County, in the heart of the Central District of California?

    Locally, here in the Central District of California, the estate doesn’t revest in the debtor until discharge. We know this because this is what our Chapter 13 form plan says. Your mileage may vary.

    cdca chapter 13 plan revesting in debtor
    The standard Central District of California Chapter 13 Plan revesting in debtor at discharge

    There is the key language that controls when you sell a home in Chapter 13 bankruptcy in most cases in the Central District of California when there is a Motion to Sell or Refi with proceeds. It means that the debtor and proceeds must not only pay “all of the plan” debt, but “all of the all” debt. This can be a strong disincentive. It often is better to just stay in the Chapter 13 until discharge, and get forgiveness of potentially tens of thousands of dollars of unsecured debt. After discharge, the house, and what you do with the proceeds, are yours.

    Now, I supposed there is nothing preventing debtor from adding a nonstandard provision to the plan that debtor’s property revests at confirmation. But that may lead to other hazards that involve the automatic stay and debtor’s property which are no longer property of the estate. Try this at your own peril.

    Conclusion

    So, yes, Virginia, you call sell a house in Chapter 13 bankruptcy. You have the right to move cities, even states, as long as you maintain your plan payments, and update your schedules to reflect current income and expenses. However, who gets the sale proceeds is very specific to where you live, what your appellate courts say, and what your local district’s forms say. As always, ask your bankruptcy attorney, and thank you for reading.

    ride-through california bankruptcy

    Ride-Through Back in Calif Bankruptcy

    Ride-Through Back in California Bankruptcy

    Ride-through is back in California bankruptcy. This is big news for 2022. It restores the right of someone in bankruptcy to be free of personal liability on a car loan in the event of a future default. To be clear, you don’t get a free car in bankruptcy. But if you don’t reaffirm the car debt, and stop paying the car after the bankruptcy discharge resulting in a repo, you won’t owe the deficiency balance.

    The change is part of SB1099, a bill the governor recently signed into law. The new law includes other protections or exemptions, for people filing bankruptcy. The changes take effect on January 1, 2023. Caution: it is likely that this may be challenged by lenders or trustees in court, so rely on this new law at your own risk. More on that below.

    Meaning of Ride-Through Doctrine in Bankruptcy

    ride-through doctrine meaning
    Meaning of Ride-through doctrine: car loan goes thru without adding dirt

    The meaning of the ride-through doctrine in bankruptcy is this: a vehicle can go through Chapter 7 bankruptcy without the debtor being on the hook for the car loan in case of future default after the bankruptcy is done.

    In my ultimate guide on Chapter 7 bankruptcy, I use a car wash as a metaphor for the process as a simple way to explain it. While the bankruptcy carwash is intended to remove much dirt, the ride-through doctrine means that the car owner isn’t forced to add the new road tar to his vehicle when it comes out the other side.

    You’d think that it would be common sense that all debts that existed at the time the debtor files bankruptcy would be discharged in the successful case. With credit cards, that’s certainly true (in most cases). However, a secured debt like that for a car or a house is treated differently. If you want to keep the car, you must stay current on the payments for life of the car loan.

    If, after the bankruptcy, the debtor and car owner loses his or her job and they need to turn in the car or have it get repossessed, what happens with the balance of the car loan? With the ride-through doctrine, the “old” bankruptcy reaches into the future and eliminates the new leftover debt. This is huge, as it can be thousands of dollars for something which was completely unplanned or unforeseen.

    2005-2022: Congress & BAPCPA End Ride-through

    It wasn’t always this way. During the dark years of 2005 through 2022, the ride-through doctrine was dead all throughout the nation. This is because back in 2005, Congress passed major bankruptcy reform called BAPCPA. As part of the sweeping changes, in a huge favor to big banks, Congress ended ride-through for all the people in the land.

    In its place, Congress compelled debtors seeking a new start by filing bankruptcy to sign reaffirmation agreements if they wanted to keep their cars. A reaffirmation agreement is where a debtor (you guessed it) reaffirms their debt in a bankruptcy.

    This means that the person signing the contract is promising to owe the debt and undo the bankruptcy with regard to it. Instead of discharging a debt, a reaffirmation is promising to owe the debt, no matter what. Promising to owe debt is bad, and the opposite of the goal of a successful bankruptcy. Millions of people seeking to be released from bondage to debt were forced to sign contracts owing it, or face losing their car anyway. These were dark times, indeed.

    2023: California restores Ride-Through in Bankruptcy

    But California changed that. In September 2022, a new law was completed which becomes effective in 2023, As part of the wide-ranging changes, California restored ride-through in bankruptcy. With Calif bankruptcy ride-through, failing to sign the reaffirmation agreement isn’t considered a default.

    The pertinent “ride-through” bankruptcy part from the new CA law:

    (2) Neither the act of filing a petition commencing a case for bankruptcy under Title 11 of the United States Code by the borrower or other person liable on the loan nor the status of either of those persons as a debtor in bankruptcy constitutes a default in the performance of any of the borrower’s obligations under the loan, and neither may be used as a basis for accelerating the maturity of any part or all of the amount due under the loan or for repossessing the motor vehicle. A provision of a contract that states that the act of filing a petition commencing a case for bankruptcy under Title 11 of the United States Code by the buyer or other individual liable on the contract or the status of either of those persons as a debtor in bankruptcy is a default is void and unenforceable.

    There it is: a person using Title 11 (which is the Bankruptcy Code) cannot be said to be in default, and any contract that says a person is liable on their car loan in case of default is void and unenforceable. This means there is no more repossession for failure to reaffirm or refusal to sign a reaffirmation agreement. This is how, during 2005-2022, some car lenders repossessed vehicles even if the borrower was current on the loan. The infraction? Failing to sign a reaffirmation agreement. So now you ask: after 1/1/2023, do I have to reaffirm a car loan in California bankruptcy and stay personally liable on the debt? The answer appears to be, “no.”

    Preemption: Supremacy Clause, federal law, and California’s ride-through

    Can a state change, or carve out an exception, to federal law? It remains to be seen whether this portion of the law will be challenged by creditors and car lenders. The strongest argument to challenge California’s bankruptcy ride-through is the Constitution’s Supremacy Clause of Art VI, Sec 2. This would state that the federal bankruptcy laws of 11 USC 521(a)(2) and 11 USC 524 are “supreme” to and therefore preempts California state law, and by applying the Supremacy Clause, the part of the state law which conflicts with federal law is void.

    A rebuttal to this would be that California’s bankruptcy ride-through is not in direct conflict with the Bankruptcy Code or of Article 1, Section 8 of the Constitution’s enumerated powers. California is not making laws about bankruptcy. Instead, the state can claim it is merely clarifying state law, as is its right. It can assert that a state has the right to define what is and is not a “default” in California, and a bankruptcy is not a default. Or whether or not car lienholders can repossess a vehicle, or make debtors owe the leftover deficiency balance on a debt after repo from an old bankruptcy case now closed. It remains to be seen if creditors or trustees act on this, and if so, which is more persuasive to a court of law.

    California’s Ride-Through is a New Day Dawning for Debtors

    new dawn of ride-through is back
    There is a new dawn: Ride-through is back in California

    The dark days of forced reaffirmation are behind us. No longer will a person seeking to become debt-free be coerced to sign a contract promising to owe on a potential future default. No more will hopeful Californians be saddled with thousands of dollars of debt after completing their bankruptcy, unable to file again for a number of years. Never again will people finishing a bankruptcy lose their car even though they were current on payments.

    A new dawn is emerging in California. A radiant era where people filing bankruptcy won’t have to worry about having an old debt survive and burden them as a future liability. A glorious future where someone can seek a new start without compulsion, and have the freedom of a clear conscience, free of worry, and without having old debt burden them.

    Yes, ride-through is back in California bankruptcy!

    Automatic stay and bankruptcy protection

    All About the Automatic Stay, the Ultimate Bankruptcy Protection

    All About the Automatic Stay, the Ultimate Bankruptcy Protection

    What is the Automatic Stay definition or meaning?

    Automatic stay is the bankruptcy protection when a new petition is filed with the court. It protects against starting or continuing any debt collection. It’s a powerful provision, and stops all collection activity, maintaining the status quo on the day the bankruptcy papers are filed. Failure to respect the bankruptcy protection can lead to sanctions against the collecting creditor.

    The Automatic Stay definition from the text of Section 362(a)

    The official definition of the bankruptcy automatic stay is in 11 USC 362. Section 362(a) says:

    “…a petition filed under section 301, 302, or 303 of this title… operates as a stay, applicable to all entities of:

    • the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
    • the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;
    • any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate…”

    The section goes on, but the quote above is where most of the action in bankruptcy protection comes from.

    Interpreting the automatic stay meaning in simple terms

    Let’s break down what the meaning of the automatic stay is in plain English. Section 362 says that the mere filing of a what? A petition that’s either voluntary, involuntary, or joint (301-303). That pretty much covers most bankruptcy filings. Then what? It stops (stays) the start or continuing most every collection, including enforcing a judgment or trying to take anything from you.

    Bankruptcy protection automatic stay is like a dome over a city
    The bankruptcy protection of the automatic stay is like a magical dome or enchanted shield over you & your stuff

    That’s really broad, and covers almost anything you can think of. It’s like a protective shield around you, your things, and your life against all your debts doing anything to you, the person who filed bankruptcy. Or, to use another simile, the automatic stay is like a dome over a city, where the sun only shines and the birds sing, but outside the shield it’s stormy and dangerous.

    There are a few limits to it, which I explain below.

    When does the Automatic Stay begin?

    The automatic stay is tremendous in that it begins the second the bankruptcy is filed. Why? It’s automatic. File a bankruptcy case, and boom, you’re safe. The fact that the bankruptcy protection starts the moment you file bankruptcy is extraordinary, in a sense.

    “It is elementary that the automatic stay comes into existence automatically and immediately upon the filing of a petition in bankruptcy.” Webb Mtn, 414 B.R.308 (Bankr Ct, Tenn, 2009).

    Normally, in law, if you want something to stop, you have to request that separately. Think of a temporary restraining order. That requires work, time, a justification, and approval. But bankruptcy protection, because it’s automatic, that is, no additional papers need to be filed to get it to kick in, it’s one of the rare exceptions in law.

    You get all the benefits of safety, protection, and peace of mind at the beginning of this legal process. Your creditors have to file lawsuits, wait months or years, get the judgment, and then try to execute on the judgment to take action against you and your stuff. You merely have to begin the bankruptcy legal case before they can finish theirs against you. This is a huge time advantage for the debtor filing bankruptcy.

    How long does the Automatic Stay last?

    The automatic stay starts when you file bankruptcy, and typically lasts for the duration of the case.

    What can end the bankruptcy protection?

    There are a few things that can end the automatic stay:

    • Discharge: When a normal case ends successfully, the debtor gets a bankruptcy discharge and the case is usually closed soon after that. When the discharge is entered, the stay is over.
    • Dismissal: If a bankruptcy case ends unsuccessfully, the automatic stay is over also. The magic dome of sunshine disappears, and the storm clouds come right back. For that reason, dismissal is usually bad.
    • Motion for Relief of the Automatic Stay (MRS or RFS): Creditors have rights also, and if the stay is hurting them unfairly, they can make it go away. Repeat after me: “There is no free car or free house in bankruptcy.” If you stop paying for the house, the mortgage can get through the automatic stay and take your house. Or put differently, if there is a house or car or something you’re financing and you want to keep it, stay current with the payments.

    Wait, back up. After bankruptcy discharge, the stay ends and creditors can collect against me?

    Yes, and no. It’s true that the automatic stay ends when the case concludes with a discharge. The bankruptcy discharge triggers a few legally significant events. First, the discharged debts are no longer legally your obligations. Second, if you had a bankruptcy attorney help you, their representation, per contract, is likely ended. They completed their task and are no longer your lawyer. Third, the automatic stay is also ended, as there is no more active or open bankruptcy case.

    However, the good news is there is something powerful replacing the terminated automatic stay. This new protection is the Order of Discharge.

    Section 524(a) says that a discharge in bankruptcy:

    operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived

    The discharge court order says your debts are gone, and any attempt to collect a discharged debt is a violation. It’s not a violation of the automatic stay, but instead, a violation of a court order. You can and should inform the creditor of this, and if they don’t back off, reopen the bankruptcy and seek sanctions for a discharge violation.

    Violation of the Automatic Stay

    Definition of an Automatic Stay Violation

    A violation of the automatic stay is when a creditor willfully collects after they knew of the bankruptcy protection. The creditor has to have known of the bankruptcy and the automatic stay, or else they can claim as a defense that they had no notice. For this reason, it’s important to document notice of the automatic stay. When the collection company claims they didn’t know of the bankruptcy — and they will — you’ll need to have ample and abundant evidence that they did know, and that they didn’t care and collected against you anyway.

    What if the Creditor doesn’t have Intent to Violate the Automatic Stay?

    Creditor, after being caught with its hand in the cookie jar, may claim that golly, it didn’t intend to violate the automatic stay. The Ninth Circuit Court of Appeals has said, too bad, you intended to do the act. Intent to violate the automatic stay isn’t a requirement. Intent to do the act that violated the stay is all that’s needed. In re Pinkstaff, 974 F.2d 113 (9th Cir, 1992), quoting In re Bloom, 875 F.2d 224, 227 (9th Cir, 1989), In re Pace, 67 F.3d 187 (9th Cir, 1995).

    Examples of Automatic Stay Violations

    Filing a Lawsuit

    One example of violating the automatic stay is where you file bankruptcy, serve the creditor notice of the automatic stay, and maybe even a letter for good measure. Then, three months later, the creditor files a lawsuit against the debtor.

    The lawsuit is the commencement of a judicial proceeding against the debtor that could have been commenced before the commencement of the case or to recover a claim against the debtor that arose before the commencement of the case under this title. Slamdunk violation of the bankruptcy protection.

    Starting a Wage Garnishment

    Another example of an automatic stay violation is where the creditor has already sued the debtor and won in court. Now, armed with a judgment, they’re closing in on collecting. The debtor files bankruptcy, and provides notice of the automatic stay to the debt collector. Next, the collection agent contacts debtor’s employer and starts garnishing the wages.

    In this case, the wage garnishment is an enforcement, against the debtor and against property of the estate (the paycheck), of a judgment obtained before the commencement of the case. Again, another obvious and textbook violation of the automatic stay.

    Foreclosing on a home

    Finally, let’s say the debtor has fallen behind on his or her mortgage. The home loan company is getting cranky, and finally files a Notice of Default and Notice of Sale. Next thing you know, there’s a scheduled foreclosure sale. Debtor then files a Chapter 13 bankruptcy to repay the mortgage arrearages, and provides notice of the automatic stay to the lender. Mortgage company goes ahead with the foreclosure sale, and someone buys the house.

    The home foreclosure is an act to obtain possession of property of the estate (the house) or to exercise control over property of the estate. Straight violation of Section 362 of the Bankruptcy Code. Check and mate, house lender. Automatic stay violation.

    Effect of the Automatic Stay on Acts that Violate it

    In that last example, the home has already been sold to someone else at a foreclosure sale. But it was the result of a stay violation. What is the effect of the sale?

    In California, stay violations are void. The Ninth Circuit Court of Appeals has said that “actions taken in violation of the bankruptcy stay are void.” In Re Gruntz, 202 F.3d 1074, 1081-82 (9th Cir, 2000). Not voidable, void. In re Schwartz, 954 F.2d 569 at 571 (9th Cir, 1992). No action is required by debtor to undo the act. Id.

    The law imposes an affirmative duty on creditors to remedy stay violations by restoring the status quo, and also to establish administrative safeguards to prevent stay violations from occurring in the first instance. In re Dyer, 322 F.3d 1178, 1192 (9th Cir. 2003).

    What if the Stay Violation happens Before Notice is Received

    Knowledge of bankruptcy sufficient for stay; notice doesn’t have to be official

    There is no requirement that a creditor be given an official Court-issued notice or form regarding the bankruptcy case. “[A] party with knowledge of bankruptcy proceedings is charged with knowledge of the automatic stay.” In re Dyer, 322 F.3d 1178, 1191 (9th Cir. 2003).

    Seizing the property doesn’t make it yours

    Now that we have established stay violations are void, what if creditor didn’t know when they violated it? Courts have clearly answered: Petition date controls, not notice.

    The U.S. Supreme Court has ruled that property seized prepetition to collect a debt doesn’t transfer ownership, and it must be returned, pursuant to Section 542(a), even if seized by the IRS. United States v Whiting Pools, Inc, 462 U.S. 198 (Sup Ct 1983).

    Even property taken by the mighty IRS before filing must be returned. With that backdrop, let’s look at cases where property is wrongfully taken after filing, but before creditor had notice of the filing.

    Keeping property seized after filing but before notice is a stay violation

    In the Ninth Circuit, the Bankruptcy Appellate Panel ruled that retention of repossessed car after receiving notice of stay is a willful violation of the automatic stay. “[R]epossession of the debtors’ automobile, while initially inadvertent, became a willful violation of the automatic stay when appellees failed to take any reasonable steps to remedy their violation upon learning of the debtors’ bankruptcy.” In re Abrams, 127 B.R. 239 (B.A.P. 9th Cir, 1991).

    The Ninth Circuit also has held that the knowing retention of estate property violates § 362(a)(3). In re Del Mission Ltd., 98 F.3d 1147, 1151 (9th Cir.1996)(citing Abrams). The appellate court rejected the argument that creditor had no obligation to turn over the property until specifically requested. Id. at 1152.

    “When a creditor lacks notice of a debtor’s bankruptcy, acts in violation of the stay may be inadvertent; however, such acts become willful stay violations when the creditor learns of the debtor’s bankruptcy but fails to take reasonable steps to remedy the violation.” In re Calloway, No. 08-18561SSC, 2009 WL 1564207, (Bankr. D. AZ. 2009) (citing Abrams)

    Other courts outside the Ninth Circuit agree

    Other bankruptcy courts have ruled that even if the creditor didn’t have knowledge, it must take steps to void the violation or face damages. Just to pick one: “Despite having this knowledge, Hunt deliberately refused to cooperate in voiding the sale and reconveying the Trenton property to the Debtor at any time after this date.

    Clearly, these actions were willful and constitute a violation of the automatic stay for which the imposition of damages is appropriate under § 362(k).” In re Tyson, 450 B.R. 754 (Bankr Ct, Tenn, 2011), where buyer of home sold at foreclosure had no notice of automatic stay at time of foreclosure sale, failed to return home, and violated stay and paid damages.

    Wrongful repo cases: repossession after filing without notice violates stay

    A wrongful repo happened after a case was filed but before the repo company had notice. What it did next is what matters: “Rather than comply with its affirmative duty to remedy its stay violation and restore the status quo, Arizona Fleet chose to remain non-responsive, took no steps to confirm or inquire as to the pendency of this bankruptcy case, filed nothing with this Court requesting any form of stay relief, sent the Debtor a notice that it intended to sell the Vehicle, wrongfully continued to maintain possession of the Vehicle, and, without merit, continues to maintain that it was incumbent upon the Debtor to retrieve his wrongfully repossessed Vehicle.” In re Altamirano, Case No. 4:20-bk-11836-BMW (Bankr Ct, AZ, 2022).

    In re Carrigg, 216 B.R. 303 (B.A.P. 1st Cir, 1998), where the repo happened after the bankruptcy was filed without the creditor knowing about it, but creditor failed to return repossessed vehicle after notice of case. The creditor was sanctioned with a willful violation of stay, even though creditor had no had notice of case when vehicle was repossessed.

    Chicago v Fulton, and the Automatic Stay

    What 362 Giveth, Fulton Taketh Away

    It used to be that if someone took something to collect a debt, filing bankruptcy created an obligation for them to return it. All that changed in 2021 when a case percolated up through the courts. The City of Chicago makes quite a pretty penny on impounding vehicles. One person lost their car, filed bankruptcy, and asked for the car back. Chicago didn’t budge. Automatic stay violation? In many places, including here in California and the Ninth Circuit, until now, yes. The Sup Court read the statute, and limited the scope and power of the automatic stay.

    The car repossession taken before filing

    The above repo cases involve a car taken after the case was filed. However, if the car was taken before the case was filed, from now on, it doesn’t have to be returned upon as a possible violation of the automatic stay with notice of the bankruptcy. Chicago v Fulton (In re Fulton), 141 S Ct. 585 (2021).

    In Fulton, the Court said that mere retention, to exercise control, of the property taken before filing (prepetition), without some act that would disturb the status quo, is not a violation of the automatic stay. This means that retention of the car (in this case) isn’t a stay violation, and that something else has to be done to get it back. The Court suggests that Section 542 (turnover) is invoked for an adversary proceeding for turnover of the property. The problem with that is that can take months to resolve. Justice Sotomayor, in a concurrence focusing on simple motions instead, writes that “bankruptcy courts may find it prudent to expedite proceedings or order preliminary relief requiring temporary turnover.” Fulton at 594.

    Not just cars: other seized property falls under Fulton

    When the Supreme Court first decided the case in early 2021, there was the thought (hope?) that maybe Fulton was limited to cars seized by tow yards. That it would be a limited, narrow exception which wouldn’t really impact us here with Los Angeles bankruptcy cases in California and the Ninth Circuit. As Fulton is applied by courts, that’s turning out to not be the case.

    Bank Levy of Accounts and Fulton

    Later in 2021, we saw a court extend it to bank accounts. In Pennsylvania, a lender sued a debtor, won a judgment, and filed a pre-petition attachment lien on bank accounts of the debtor. Debtor filed bankruptcy and then demanded creditor withdraw the attachment as a violation of the stay. A key difference is that, unlike Fulton, creditor was not in possession of property of the estate. No matter. The court said that Fulton requires an act that disrupts the status quo to find a stay violation when it wrote, “the Court finds that Defendants’ refusal to withdraw the valid state court pre-petition attachment of the Penn East Accounts does not violate §362(a)(3). Defendants admittedly took no post-petition affirmative action as to the garnished accounts.” In re Margavitch, 5:19-05353 MJC (Bankr Ct, MD 2021).

    The Ninth Circuit BAP followed Margavitch when it had a bank levy case of its own. The facts were similar: a prepetition lawsuit, and a writ of garnishment on three bank accounts. Later, debtor filed bankruptcy and demanded the creditor instruct the bank to release the funds. After a refusal, debtor claimed it was a violation of the stay. The BAP found that the city’s inaction that merely maintains the status quo does not violate the automatic stay. In re Stuart, 632 BR 531 (9th Cir BAP, 2021).

    The BAP made the point again in 2022 when it said that a lien that existed on petition date where an order granted postpetition about summary judgment regarding it did not disturb the status quo and thus, did not violate Section 362(a)(3). In re Censo, 638 BR 416 (9th Cir BAP, 2022). The rationale is that the automatic stay is inapplicable in lawsuits brought by the debtor, and a defendant can defend itself without an automatic stay violation.

    Wage Garnishments and Fulton

    While Stuart above was a bank account case, the BAP said in footnote 12 that, if it were a wage garnishment case where the creditor captured funds postpetition, the result would be different and a stay violation. Stuart v City of Scottsdale, 632 BR 531 (9th Cir BAP, 2021), citing In re LeGrand, 612 BR 604 (Bankr Ct EDCA, 2020).

    Chapter 13 Codebtor Stay

    What is the Co-debtor Stay?

    Chapter 13 has a codebtor stay, while Chapter 7 doesn’t. Section 1301 and its co-debor stay protects the person who may owe on a debt without that other person having to file bankruptcy. For this reason, Chapter 13 can protect a non-filing spouse better than a Chapter 7 bankruptcy.

    Community liability: you both owe the debts of the marriage

    California’s Family Code 910 says:

    Except as otherwise expressly provided by statute, the community estate is liable for a debt incurred by either spouse before or during marriage, regardless of which spouse has the management and control of the property and regardless of whether one or both spouses are parties to the debt or to a judgment for the debt.

    Further, Calif Family Code 914 says:

    …a married person is personally liable for the following debts incurred by the person’s spouse during marriage …a debt incurred for necessaries of life of the person’s spouse before the date of separation of the spouses.

    Translating that, because California is a community property state, both spouses owe a debt during the marriage, regardless of who is managing the budget, or racking up the debt. You’re in this together.

    So, if one half of a married couple incurred a lot of debt and files bankruptcy in Chapter 13, the other innocent spouse is protected by an automatic codebtor stay. In Chapter 7, the innocent spouse can still be called and harassed and risk losing any separate property (if any) to the spouse’s collecting creditors. Why? FC 914(b) says that the “separate property of a married person may be applied to the satisfaction of a debt for which the person is personally liable pursuant to this section.”

    Section 1301 Co-debtor stay to the rescue

    Now we know that a spouse (or other person who may owe on a debt) is liable for debts during a marriage, even though they didn’t incur them or even have any credit cards. If the spending spouse files bankruptcy, the innocent spouse may be left hanging in Chapter 7. But Chapter 13 has a solution.

    Section 1301 says

    creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any individual that is liable on such debt with the debtor

    There it is. A creditor may not act, start or keep doing something to someone liable on a debt with a debtor. In California, that’s typically a spouse. Automatic stay for the nonfiling spouse in the form of the co-debtor stay is a big benefit to Chapter 13 bankruptcy.

    The hitch: creditors claim to not know about spouses & the codebtor stay

    Amazingly, with all their fancy computers, creditors and their collection companies don’t have a way to know about or track nonfiling spouses. If John Doe files bankruptcy, they’ll flag his account, but they don’t know about Jane Doe, even though she’s listed as a Codebtor in the bankruptcy paper’s Schedule H. They do a scrub or routine check but will say they don’t know Jane’s SSN as a way to flag her, too. So they keep collecting against her, which pressures John, but golly, it’s just an accident.

    This can require “educating” the creditor with notice of the stay before bringing an action for violation of the stay against them for harassing the spouse, in our example, Jane. The fallback position of the fancy slick credit card company will default to becoming Barney Fife. The billion-dollar corporation will morph into bumbling inept two-bit outfit in court who just didn’t know about the spouse and therefore didn’t have notice or any way to possibly avoid this and and thus will seek mercy from the bankruptcy judge for its incompetence. Thus, more notice, more evidence that the creditor knew about the spouse and the bankruptcy, will help you bring your violation of codebtor stay action and prevail.

    Actions which are not violations of the Automatic Stay

    While the bankruptcy protection of the automatic stay is wide and broad, we’ve seen with Fulton that it does have its limits. One other such limit is collection on a nondischargable debt upon property outside the bankruptcy estate.

    That was the issue the Ninth Circuit BAP faced when it ruled, “‘Nevertheless, binding authority is clear that “the automatic stay provisions of Section 362 do not preclude the execution of a judgment, which has been held by the bankruptcy court to be non-dischargeable, upon property of the debtor which is not property of the estate.'” In re Cady, 266 BR 172, 180 (9th Cir BAP, 2001).

    Damages: the Penalty for Automatic Stay Violations

    The automatic stay is one of the few areas in bankruptcy where debtors can get their attorney fees paid by the creditor. The Bankruptcy Code provides at Section 362(k) that:

    an individual injured by any willful violation of a Stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.

    Let’s look at these one at a time.

    Compensatory: Actual Damages

    Costs

    Actual damages comes in a couple different flavors. First, it’s whatever the debtor is truly, actually out-of-pocket as a result of the violation of the automatic stay. Judges typically want to see receipts. It can include as mundane things as copying costs, doctor visit copays, and so on.

    Attorney Fees

    In addition, the statute explicitly calls for the debtor getting reimbursed by the creditor for attorney’s fees. The lodestar method for attorney compensation is used in the Ninth Circuit bankruptcy cases. In re Yermakov, 718 F.2d 1465, 1471 (9th Cir. 1983). Lodestar compensation is “strongly” presumed to be reasonable. Burgess v. Klenske, 853 F.2d 687, 691-92 (9th Cir. 1988). The only limit on attorney’s fees is if the work was unnecessary or plainly excessive. The Ninth Circuit Court of Appeals, sitting en banc, concluded that Section 362 authorizes an award of attorney fees incurred in prosecuting an action for damages under the statute, limited by unnecessary or plainly excessive fees. In re Schwartz-Tallard, 803 F.3d 1095, 1101 (9th Cir 2015)(en banc), overturning Sternberg v Johnston, 595 F.3d 937 (9th Cir, 2010).

    Emotional Distress

    Emotional distress damages are available in the Ninth Circuit “if the individual provides clear evidence to establish that significant harm occurred as a result of the violation.” In re Dawson, 390 F3d 1139, 1148-1149 (9th Cir, 2004).

    Punitive Damages

    The statute calls for punitive damages in appropriate circumstances. The definition of “appropriate circumstances” varies by judicial circuit. Here in the Ninth Circuit, it means that punitive damages for violations of the Automatic Stay require “some showing of reckless or callous disregard for the law or rights of others.” In re Bloom, 875 F.2d 224, 227 (9th Cir., 1989).

    The dreaded Wells Fargo case

    Wells Fargo is notorious for their national policy of administrative freeze or holds, officially called “temporary administrative pledges” (which I wrote about in my list of 12 crucial things to do before filing bankruptcy). This is where someone files bankruptcy and has money on account at Wells Fargo. Then the bank freezes the account so the debtor can’t buy groceries. One would think this is a violation of the automatic stay, but it’s not an attempt to collect a debt, but to protect assets of the estate.

    The Ninth Circuit BAP ruled that because defendant exercised control of debtor’s assets postpetition, debtors “have standing to seek sanctions against Wells Fargo pursuant to § 362(k) for willful violation of the stay with respect to their interest in estate property.” In re Mwangi, 432 BR 812, 825 (9th Cir BAP, 2010). But on appeal, the Ninth Circuit Court of Appeals said that the property, while exempt, is property of the estate, but somehow does not immediately revest to the debtor, but must wait 30 days for the FRBP 4003(b)(1) exemption objection time period to lapse. In re Mwangi, 764 F3d 1168 (9th Cir, 2014).

    The court analyzed it as a 362(a)(3) situation (control of property), but if it were the more common commencement or continuance of an action of 362(a)(1), the result likely would’ve been different. So, the Wells Fargo case is not an erosion of the automatic stay.

    Conclusion

    The automatic stay is a powerful tool to protect your client in a bankruptcy. However, you must enforce it, and have proper documentation of evidence. I’ve successfully brought actions against major credit cards for violating the stay; it can be done. if you found this helpful and are faced with a stay violation issue, consider hitting the figurative tip jar. Regardless, thank you for reading, and never stop fighting for your client and the debtor’s rights. You have significant tools and bankruptcy protections here, and you should not hesitate to hold the creditor accountable for flaunting them.