I had spent at least six hours with the clients over several months, strategizing about extracting them personally from a cratering business situation, when he said, “Oh, I haven’t told you about…”

Others at the meeting said my eyes popped and I’m sure my face fell.

He owned another business corporation, which had assets, filed tax returns, and stood utterly apart from the holdings we’d been dealing with.

Now, what possessed him to overlook this entity over such a protracted period of time I cannot say.  Stress perhaps.  Other issues threatened to bite, while this corporation was perhaps an opportunity without (yet) troubles.

But it fed into a theme in my professional life last week: unexpected assets.

Another client in a second or third meeting last week came round to owning up to title to the corporation’s domain names, some trade marked intellectual property,  and a potentially valuable customer list.

So, the call today is to keep digging as you look for assets.

Business wrinkles

The usual suspects, if you will, are business people, particularly if they have incorporated a business once operated as a proprietorship.  Assets bought by the individual frequently don’t get transferred to the business entity.  Or, for tax purposes, they create a separate entity to lease some asset or provide some service to the business.

When the business is a separate legal entity, it often owes the shareholders for loans, funds advanced, use of individual assets.

Wait, wait, there’s more

But it’s not just business folk who hold unexpected assets. At the Northern California Bankruptcy Forum, Folsom bankruptcy attorney Gary Gale presented a confidence-shattering list of things to ask about not in my current client patter.

And another presenter, who works for trustees, talked about accessing Google Street View and Google Maps to see what was visible on the debtor’s property.  He reported finding tractors, multiple unlisted vehicles, livestock, and outbuildings containing who-knows-what.

Get better digging implements

If we assume that it’s inattention or distraction, not the desire to deceive, that leads clients to omit stuff, then we have to become good listeners and linguists.

Listen for the clues to activities or locations not yet mentioned.  Scour the tax return for depreciation on things you haven’t heard about, the paystub for deductions you can’t identify.

Widen your vocabulary.  My friend Charlotte bankruptcy attorney Susanne Robicsek memorably tells about asking a client if they had a couch in their living room.  No, the client replies.  A davenport?  No, again.  A sofa?  Oh, yes, we’ve got a sofa.

So, don’t take “no” as the final word.

Less than obvious assets

Let’s start a list of assets that may elude us:

1. Accrued vacation pay
2. Paypal accounts
3. Insurance claims
4. Class action membership
5. Health savings accounts
6. Liquor licenses
7. Timeshares or vacation club points
8. Claims for as yet unreimbursed business expenses
9. Domain names and  websites
10. Trade marks or trade secrets
11. Book royalties
12. Renewal commissions
13. Realtor commissions on pending transactions
14. Loans made to closely held businesses
15. Vested rights in trusts and estates
16. Stock or options in companies not (yet) public
17. Business leases in the individual’s name
18. Season tickets
19. Airline tickets or paid for vacations
20. Security deposits for utilities or rentals
21. Legal claims not yet filed

Keep digging.  There are undoubtedly more.

 Image courtesy of Mary MacTavish.

Why should I help my competitors?

That was the query of a highly experienced bankruptcy lawyer I met at the Northern California Bankruptcy Forum last week.

I heard the same push back on one of Jay Fleischman‘s listserves from a participant who didn’t want to share with others in his professional community an upcoming education opportunity.

“I don’t want my competition to improve”.

I can think of a number of reasons I want the lawyers around me to raise the standard of bankruptcy practice.

• Cross fertilization:  my skills are sharpened watching and opposing good lawyers
• The public is better served by a skillful bar
• Good lawyers don’t willy nilly make bad law
• The higher the quality of the practice the less likely we get petty and unnecessary rules, regulations and oversight from outside

I’m confident that I can compete with those I’m helping.

What do you think?

Image courtesy of shaggy359.

Kismet,  def. fate or destiny, seemed to be in play this weekend.

Or maybe it’s that I’m like a magpie with a fixation on books rather than shiny objects.

But the first thing that caught my eye in the exhibitors hall at the Northern California Bankruptcy Forum this weekend was the NCLC book on evidence.  It wasn’t labeled “evidence for dummies” but it could have been.

Actually it was titled Instant Evidence, A quick guide to Federal evidence and objections.  Spiral bound, 20 pages, plasticized for heavy use.  Sold.

Evidence, particularly court room evidence, isn’t my strong suit.  I don’t get to evidentiary hearings often enough for this to be second nature.  So a summary, a cheat sheet was really appealing.

Is that an echo?

But I didn’t realize that evidence was going to be a theme, repeated again.  Judge Ron Sargis, a former organizer of this conference, and new to the bench with the past year or two, talked about his campaign for evidence accompanying motions in his courtroom.

Think of it:  the man actually wanted admissible evidence in support of the orders bankruptcy lawyers sought from him.

I gathered that it had gone from gentle hints from the bench to, when things didn’t change, to the denial of motions not properly supported by evidence.

We are federal practitioners

Over my career as a bankruptcy lawyer, the practice of consumer bankruptcy law has gone from being a rather informal practice, often not very well done, to a practice in which the federal rules are actually applied, cases are occasionally appealed, and a real record is necessary.

Which brings me to my conversations with Tara Twomey, of counsel to NCLC and head of the amicus project at NACBA.  In discussing several cases pending in the circuit courts, she bemoaned the fact that several of them were appealed without a sufficient record from the bankruptcy court.  And she didn’t mean the tapes of the hearing were lost.  It meant that counsel had not entered into the record admissible evidence to establish the critical facts.

All too often, bankruptcy lawyers file motions where the only facts found are in the motion.  And the motion isn’t evidence.  It takes documents, with a foundation, or a declaration under penalty of perjury, to get your “facts” before the court as evidence.  And without evidence,  a scrupulous  court is hard pressed to rule in your favor.

Evidence:  it’s fated.

Image of the evidence courtesy of redjar.

Love and Marriage.

Fries and Catsup.

Chips and Dip.

Like these famous pairings, divorce and bankruptcy are frequent companions.

When a couple goes their separate ways, often the most substantial marital accumulation is debt.

The questions we get as bankruptcy practitioners usually revolve around whether to file a bankruptcy case before or after the divorce.

The sound answer is, of course,  “it depends”.

The argument for filing before revolves around the economy of filing a joint case.  There’s one filing fee, one attorney.  Also, the pile of debts to be divided is reduced by the bankruptcy discharge.

The counter argument looks at the parties’ ability to cooperate in the bankruptcy case;  the unpredictable treatment of the debtor by the state court in a post bankruptcy divorce ; and the question of whether a premature bankruptcy will expose one party or the other to a debt that could have been discharged in a post divorce bankruptcy.

But for the issue of the time wasted dividing debts,  I’ve felt the conservative position was to file after the divorce, but it seemed like a conservatism that protected me as the bankruptcy lawyer at the expense of my client. There was less chance of unexpected consequences in waiting, but certainly at a price for the client.

Support invulnerable

The given is that support debts are not dischargeable in any chapter, at any time. Prepetition domestic support obligations have priority for payment and post petition currency on support is a condition of  a Chapter 13 discharge.

The stay doesn’t apply to proceedings for custody, visitation, modification of support, or termination of marital status.

Non support debts

One of the few areas of bankruptcy law that BAPCPA made easier was the treatment of non support debts that arise in a divorce.  Section 523(a)(15) now flatly makes debts to a spouse, former spouse, or child of the debtor incurred in the course of the divorce non dischargeable.

Pre BAPCPA, the section made discharge of such debts conditioned on the timely filing of an adversary by the spouse or child and a determination that the creditor would be more disadvantaged by discharge than the debtor, should the debt not be discharged.

It was messy, expensive and uncertain.  Now, the rule is straight forward and predictable.

Chapter 13 is different

What is critical to note is that §523(a)(15) is not one of the exclusions from the Chapter 13 discharge.

So, if the debt is not in the nature of support and the creditor is a spouse, former spouse or child of the debtor, the debt can be discharged in Chapter 13.

Make sure your intake procedures identify former spouses, debts that may be in the nature of support, and the prospects for a divorce in the near future as you work your way through the thicket of marital debts.

Image courtesy of greywulf.

I learned something new last week and it took the ***!#### means test to teach it to me.

The case involved a couple where the non filing wife ran an interior decorating business.  The income and expense information we were presented with showed “lots” of money flowing through the business.

Subtract the given business expenses and our figures said these folks should be paying several thousands of dollars a month.

Yet the oral narrative said they were driving old cars, the house needed maintenance, and they hoped for a total payment in the $500 range.

The problem

We got the bookkeeper prepared income and expense statements.  My partner and I sat together huddled over tax returns and a calculator to try to find the disconnect.  Something was missing.  Why did the numbers show gobs of money, and the clients cry poor?

It wasn’t until I dragged both of them in to go over what we had that I learned something new:  the sales taxes didn’t appear on an income and expense statement.

Bingo!  Evidently, in bookkeeper-speak ,  taxes aren’t a business expense.  They get paid, and these clients were paying them, but the standard accounting form didn’t show them.  Subtract the sales tax, and the means test worked.

And as I talked to them, I learned the freight charges paid on the goods the decorator ordered weren’t on the expense statement either.

The lesson

So, the narrow take-away is that some taxes don’t appear on Quickbooks income and expense statements.

The broader lesson though is the need to keep digging til you’re convinced you have the numbers right.

Sometimes what you see is the reverse of my problem:  lifestyle that is inconsistent with the money flowing through the bank.  You have to ask if the client is helping themselves to cash from the till or whether the business is paying some of the personal expenses.

I love business cases and business people.  Add a facility with small business to your skill set and the world of clients who need you expands.  But keep asking questions til you get the answers that make sense and fill the gaps.

Image:  Gorilla-Fotolia.com

If there’s a bright spot in the midst of this recession, it’s the thrill bankruptcy lawyers get in stripping mortgage liens from underwater property.

Action taken at the depths of home values will benefit clients long into the future if the client can hang on to the home til things recover.

Yet I hear lawyers wrestling with  lien stripping worries revolving around mismatches between who’s on title to the property; who is liable on the debt; and whether the necessary persons are in bankruptcy.

Let me suggest that the issue is simpler than that and invite you to tell me if I’m missing something

It’s all about the property

Put simply, my proposition is that the only one of the questions posed above that matters is: does the bankruptcy estate include all of the property from which you want to strip a lien?

Or, put another way, in the affirmative, a bankruptcy court can only strip a lien from property of the estate.

Lien stripping is grounded in the idea of an allowed secured claim.  Section 506(a)(1)  provides:

An allowed claim of a creditor secured by a lien on property in which the estate has an interest, … is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property,

Notice that secured status has no connection to whether it is the debtor who is liable on the underlying claim.  The focus is on the property which is property of the estate.

Lien stripping in practice

Suppose the debtor inherited the real property in question from his grandmother subject to liens in favor of her creditors.  In the debtor’s bankruptcy case, a lien securing the grandmother’s promise to pay Big Fat Bank is just as strippable as if the debtor was the borrower.  As long as the property which is collateral for the debt is before the court, the lien is subject to valuing, and stripping.

Contrast a case where the debtor is a co tenant with a sibling on the same inherited house.  Both halves of the house are subject to the bank’s lien.  If only one heir files bankruptcy, only that heir’s interest in the house is property of the estate, and the court can only strip the lien from the fraction of the property that is in the bankruptcy estate.

The more common fact pattern seems to be that one spouse is on title to the property and the other spouse is liable on the note.  If applicable law brings all the real estate into the bankruptcy estate, then who took the loan is irrelevant.  It’s strippable to the extent the collateral is property of the estate.

Get this problem pinned down, and life as a bankruptcy lawyer is easier.

Image courtesy of wikimedia and some ancient Greek.

Some mistakes the Chapter 13 trustee will call you on;  others go unremarked.  

So let’s discuss some simplistic thinking that has your Chapter 13 client paying too much into the plan.

I’ve reviewed any number of newbie plans that use the non exempt equity in the debtor’s possessions as the liquidation premium.

Subtract the exemptions from the value of the assets and you have, they think, the measure of the “best interests of creditors” test for confirmation.

Nope.  Let’s look at the Code to see why that’s too much.

Confirmation test

The Code requires for confirmation that a plan give each unsecured claim no less than the amount that would be paid on the claim in a Chapter 7 liquidation.  § 1325(a)(4).

The difference between the newbie world view and the Code encompasses the trustee’s costs of administration.

In a Chapter 7, tangible assets don’t become distributable dollars at the wave of the trustee’s wand.  The trustee generally incurs expenses, payable from the estate, in turning assets into cash.

The trustee also gets paid from the estate for his work.  The formula for paying trustees is found in §326(a).  So the trustee’s commission comes off the gross total of dollars distributed to creditors. (The trustee does not get a commission on any money paid to the debtor on account of exemptions, or any money paid to co owners of assets he sells).

Asset by asset

In calculating the plan pot, debtor’s counsel needs to analyze how much it will cost the trustee to administer the estate up to the point where he is ready to cut checks to creditors.

If the asset is cash in the bank, there are no “costs of sale”.  Trustee writes a letter and the money is turned over.

If the asset is real estate, the estate will be paying a realtor and closing costs.  A sale of land will usually require the estate to file a tax return, so subtract something for an accountant.

Suppose the real estate is depreciated real property:  there may be capital gains taxes which the estate must pay before paying out money to creditors.  Take that off the sum of non exempt equity.

And if the asset is a preference action, some allowance has to be made for the costs of collection.  Or an analysis of whether a preference of small size would actually be recovered.  You must make deductions here for either the costs of suit, including professional fees, and for any discount offered to reach settlement.

You get the picture.  Imagine what it takes to turn the debtor’s non exempt assets into cash and quantify the costs of doing so.

It is the net, non exempt equity that measures what unsecured creditors, priority and general unsecureds, must get to have a confirmable plan.

Go forth, readers, and calculate.

If you are local to the San Francisco Bay Area, I’m presenting a two hour live class on crafting Chapter 13 plans.  A more detailed look at the liquidation test is just a part of that exploration of how to get to the right numbers for a Chapter 13 plan.  The date is April 14th.  There are more details at Law-full.com.

Image courtesy of Sharon Drummond.