Sunday, December 30, 2012

THE AUTOMATIC STAY AND NON-DISCHARGEABLE DEBTS IN CHAPTER 7 AND CHAPTER 11: IS IT IS VALUABLE AS YOU THINK?



THE AUTOMATIC STAY AND NON-DISCHARGEABLE DEBTS IN CHAPTER 7 AND CHAPTER 11:  IS IT IS VALUABLE AS YOU THINK?


Published on by: Ian M. Falcone


THE AUTOMATIC STAY AND NON-DISCHARGEABLE DEBTS IN CHAPTER 7 AND CHAPTER 11:  IS IT IS VALUABLE AS YOU THINK?

We have all seen the advertisements:  “Stop the phone calls!  Stop the garnishments!  Stop the lawsuits!  Call Now!”  But does the automatic stay always deliver on its promise?  The answer to that may be, at least in limited circumstances, surprisingly, no.

11 U.S.C. 362 states:
(a)  Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title [11 USCS § 301, 302, or 303], or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970 [15 USCS § 78eee(a)(3)], operates as a stay, applicable to all entities, of--
                            (1)  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;
                            (2)  the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;
                            (3)  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;
                            (4)  any act to create, perfect, or enforce any lien against property of the estate;
                            (5)  any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;
                            (6)  any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;
                            (7)  the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and
                        (8)  the commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability of a debtor that is a corporation for a taxable period the bankruptcy court may determine or concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this

However, it is what the stay does NOT apply to that is more troubling:

            (B)  of the collection of a domestic support obligation from property that is not property of the estate: (emphasis added)


11 U.S.C. 541 excludes certain property from the bankruptcy estate as follows:

(b)  Property of the estate does not include--
                            (1)  any power that the debtor may exercise solely for the benefit of an entity other than the debtor;
                            (2)  any interest of the debtor as a lessee under a lease of nonresidential real property that has terminated at the expiration of the stated term of such lease before the commencement of the case under this title, and ceases to include any interest of the debtor as a lessee under a lease of nonresidential real property that has terminated at the expiration of the stated term of such lease during the case;
                            (3)  any eligibility of the debtor to participate in programs authorized under the Higher Education Act of 1965 (20 U.S.C. 1001 et seq.; 42 U.S.C. 2751 et seq.), or any accreditation status or State licensure of the debtor as an educational institution;
                            (4)  any interest of the debtor in liquid or gaseous hydrocarbons to the extent that--
                                                    (A) 
                                                                            (i)  the debtor has transferred or has agreed to transfer such interest pursuant to a farmout agreement or any written agreement directly related to a farmout agreement; and
                                                                            (ii)  but for the operation of this paragraph, the estate could include the interest referred to in clause (i) only by virtue of section 365 or 544(a)(3) of this title [11 USCS § 365 or 544(a)(3)]; or
                                                    (B) 
                                                                            (i)  the debtor has transferred such interest pursuant to a written conveyance of a production payment to an entity that does not participate in the operation of the property from which such production payment is transferred; and
                                                                            (ii)  but for the operation of this paragraph, the estate could include the interest referred to in clause (i) only by virtue of section 365 or 542 of this title [11 USCS § 365 or 542];
                            (5)  funds placed in an education individual retirement account (as defined in section 530(b)(1) of the Internal Revenue Code of 1986 [26 USCS § 530(b)(1)]) not later than 365 days before the date of the filing of the petition in a case under this title, but--
                                                    (A)  only if the designated beneficiary of such account was a child, stepchild, grandchild, or stepgrandchild of the debtor for the taxable year for which funds were placed in such account;
                                                    (B)  only to the extent that such funds--
                                                                            (i)  are not pledged or promised to any entity in connection with any extension of credit; and
                                                                            (ii)  are not excess contributions (as described in section 4973(e) of the Internal Revenue Code of 1986 [26 USCS § 4973(e)]); and
                                                    (C)  in the case of funds placed in all such accounts having the same designated beneficiary not earlier than 720 days nor later than 365 days before such date, only so much of such funds as does not exceed $ 5,850;
                            (6)  funds used to purchase a tuition credit or certificate or contributed to an account in accordance with section 529(b)(1)(A) of the Internal Revenue Code of 1986 [26 USCS § 529(b)(1)(A)] under a qualified State tuition program (as defined in section 529(b)(1) of such Code [26 USCS § 529(b)(1)]) not later than 365 days before the date of the filing of the petition in a case under this title, but--
                                                    (A)  only if the designated beneficiary of the amounts paid or contributed to such tuition program was a child, stepchild, grandchild, or stepgrandchild of the debtor for the taxable year for which funds were paid or contributed;
                                                    (B)  with respect to the aggregate amount paid or contributed to such program having the same designated beneficiary, only so much of such amount as does not exceed the total contributions permitted under section 529(b)(6) of such Code [26 USCS § 529(b)(6)] with respect to such beneficiary, as adjusted beginning on the date of the filing of the petition in a case under this title by the annual increase or decrease (rounded to the nearest tenth of 1 percent) in the education expenditure category of the Consumer Price Index prepared by the Department of Labor; and
                                                    (C)  in the case of funds paid or contributed to such program having the same designated beneficiary not earlier than 720 days nor later than 365 days before such date, only so much of such funds as does not exceed $ 5,850;
                            (7)  any amount--
                                                    (A)  withheld by an employer from the wages of employees for payment as contributions--
                                                                            (i)  to--
                                                                                                    (I)  an employee benefit plan that is subject to title I of the Employee Retirement Income Security Act of 1974 [29 USCS §§ 1001 et seq.] or under an employee benefit plan which is a governmental plan under section 414(d) of the Internal Revenue Code of 1986 [26 USCS § 414(d)];
                                                                                                    (II)  a deferred compensation plan under section 457 of the Internal Revenue Code of 1986 [26 USCS § 457]; or
                                                                                                    (III)  a tax-deferred annuity under section 403(b) of the Internal Revenue Code of 1986 [26 USCS § 403(b)]; except that such amount under this subparagraph shall not constitute disposable income as defined in section 1325(b)(2) [11 USCS § 1325(b)(2)]; or
                                                                            (ii)  to a health insurance plan regulated by State law whether or not subject to such title; or
                                                    (B)  received by an employer from employees for payment as contributions--
                                                                            (i)  to--
                                                                                                    (I)  an employee benefit plan that is subject to title I of the Employee Retirement Income Security Act of 1974 [29 USCS §§ 1001 et seq.] or under an employee benefit plan which is a governmental plan under section 414(d) of the Internal Revenue Code of 1986 [26 USCS § 414(d)];
                                                                                                    (II)  a deferred compensation plan under section 457 of the Internal Revenue Code of 1986 [26 USCS § 457]; or
                                                                                                    (III)  a tax-deferred annuity under section 403(b) of the Internal Revenue Code of 1986 [26 USCS § 403(b)];
         except that such amount under this subparagraph shall not constitute disposable income, as defined in section 1325(b)(2) [11 USCS § 1325(b)(2)]; or
                                                                            (ii)  to a health insurance plan regulated by State law whether or not subject to such title;
                            (8)  subject to subchapter III of chapter 5 [11 USCS §§ 541 et seq.], any interest of the debtor in property where the debtor pledged or sold tangible personal property (other than securities or written or printed evidences of indebtedness or title) as collateral for a loan or advance of money given by a person licensed under law to make such loans or advances, where--
                                                    (A)  the tangible personal property is in the possession of the pledgee or transferee;
                                                    (B)  the debtor has no obligation to repay the money, redeem the collateral, or buy back the property at a stipulated price; and
                                                    (C)  neither the debtor nor the trustee have exercised any right to redeem provided under the contract or State law, in a timely manner as provided under State law and section 108(b) [11 USCS § 108(b)]; or
                            (9)  any interest in cash or cash equivalents that constitute proceeds of a sale by the debtor of a money order that is made--
                                                    (A)  on or after the date that is 14 days prior to the date on which the petition is filed; and
                        (B)  under an agreement with a money order issuer that prohibits the commingling of such proceeds with property of the debtor (notwithstanding that, contrary to the agreement, the proceeds may have been commingled with property of the debtor),  unless the money order issuer had not taken action, prior to the filing of the petition, to require compliance with the prohibition. Paragraph (4) shall not be construed to exclude from the estate any consideration the debtor retains, receives, or is entitled to receive for transferring an interest in liquid or gaseous hydrocarbons pursuant to a farm out agreement.

In most cases, the ERISA related exceptions are probably most relevant.  While IRA’s are considered part of the bankruptcy estate (although typically protected by state and federal exemptions), retirement plans such as 401Ks are technically, not part of the estate.  See Patterson v. Shumate, 504 U.S. 753, 112 S. Ct. 2242, 119 L. Ed. 2d 519, 1992 U.S. LEXIS 3546, 60 U.S.L.W. 4550, 15 Employee Benefits Cas. (BNA) 1481, Bankr. L. Rep. (CCH) P74,621A, 26 Collier Bankr. Cas. 2d (MB) 1119, 23 Bankr. Ct. Dec. 89, 92 Cal. Daily Op. Service 4996, 92 Daily Journal DAR 7949, 6 Fla. L. Weekly Fed. S 416 (U.S. 1992)


In a recent individual Chapter 11 case, a creditor (the debtor’s ex-wife) filed a motion for relief from the stay.  The debtor had been found in willful contempt of the parties’ divorce decree in that he had failed to pay his child support and certain property division obligations.  The ex-wife now wanted permission to pursue the contempt claim, including incarceration.

The Bankruptcy Court acknowleged that virtually all of the debtor’s assets at the time the case was filed belonged to the estate and that any post-petition earnings were also included under Chapter 11. 

The Court stated that the debtor’s ex-wife had the right to pursue collection of the debts from non-estate assets.  In fact, had that been the ex-wife’s clear intent, a motion for relief would probably have not been necessary.  Having opened the door that the stay was not absolute, the Court asked, “Doesn’t the Superior Court have the right enforce its own contempt order?”  So long as enforcement does interfere with the stay, my answer, reluctantly, was yes.  However, I could not fathom how it would be possible in this case as the debtor had no property rights that would be excluded form the estate.

In the end, the Court, likely because of the history of the divorce and contempt cases, granted the motion for relief but added language that the stay did not allow for collection from assets of the estate including post-petition earnings.  Not surprisingly, the Superior Court has reinstated its existing Contempt Order, which includes a provision to incarcerate the debtor.  A motion in now pending in the Superior Court to vacate that order as a violation of the stay.

But the lesson to be learned here, is that, if the debtor’s actions have been egregious enough, and if the creditor is willing to press the Court for relief, the mere filing of a bankruptcy case may not be as valuable as you think.





1 comment:

  1. I had a buyer that wanted to buy a home in Arizona, but he had a Chapter 7 bankruptcy 7 months ago. After researching the web I found a loan program at http://www.cfsflex.com, they allow a mortgage after a foreclosure, short sale, or bankruptcy. There is only a six month waiting period. Good to see lending options coming back.

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