High Income Debtors & Money On The Table

High stakes & the USTUsually my posts here have a message or a lesson imbedded.

This one doesn’t, unless readers can help me find it.

But it was a prickly case that resolved well, for unanticipated reasons.  Perhaps, there’s a lesson lurking somewhere here.

The clients were well above median income:  a high tech engineer and a stay at home mom with two children under 9.

The major creditor was the contractor whose remodel of their house caused them ultimately to lose the house.  Rumor said the contractor’s partnership broke up over the botched project as well.

Net, net, net, emotions ran high.

After an unsuccessful attempt at a Chapter 13 case, we dismissed and filed Chapter 7.  The intent was to let the house go.  But the secured debt on the house was an available deduction on B-22, in 7 anyway.

Enter the UST who brought a motion to dismiss under §707(b)(3).  She had a laundry list of disputed expenses, including appropriate care for two children with learning differences and sports and music lessons.  She also seemed offended at a mother who wasn’t in the workforce.

The hearings on the issue extended over months, with the judge apparently leaning our way, but looking for  deeper record on some of the issues.

The frustrating thing for me was that there seemed to be no settlement possibilities available.  Chapter 13 wasn’t affordable since we relied on the mortgage interest deduction on the house-to-be-surrendered to avoid monthly disposable income.  It seemed to be a win or lose confrontation.

When up popped the issue of some stock options that we thought the trustee had abandoned.  The trustee reversed himself and said, “no, those are mine”.

I ended up saying halleluiah.  Because with the prospect of an asset in a case heretofore a no asset case, the UST withdrew the motion to dismiss.

The loss of the stock options was far less expensive than funding a Chapter 13 plan without the home mortgage payment deduction.  We had a perverse sort of settlement of the abuse motion.

Is there a takeaway?

The outcome had lead me to wonder whether leaving some money on the table, some asset for creditors, in a case where the 707 issues lurk might not be a cheaper way out of such disputes. Make a preferential payment.  Leave unexempted cash.  Put the UST to a decision about whether they want to dismiss an asset case in a fight over income.

What do you think?

Image courtesy of Graham Binns

 If you are in the Northern District of California, consider joining me for a 2 hour exploration of community property issues in bankruptcy cases July 12 5-7 at the Computer History Museum in Mt. View.  We’ll look at all the strange and wonderful things that happen when married people, or formerly married people, file bankruptcy.  Sign up info.

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  1. It’s definitely a cost benefit analysis that I try to run through with clients when the case appears to be headed for a fight we can see before the case is filed.  It starts with knowing the trustees well enough to anticipate the issues that may arise, and then conditioning the client on what to reasonably expect if the case doesn’t go as smoothly as you hope.

    Ultimately, I think that leaving a piece of the pie for the trustee in a case with 707 issues is simply proper exemption planning, and if it can avoid the case getting dismissed, then you should explore the option with your client.

  2. Phil_Rhodes says:

    I think you’ve articulated what experienced bankruptcy attorneys (i.e. those that practiced before the latest recession) understand intuitively, but can’t or don’t always articulate.  It’s not always a good thing to exemption plan your way to a no asset case.  Sometimes a Chapter 7 that requires the debtor to turn over assets to the trustee is the best option for the client.  But, it often takes quite a bit of gentle persuasion for them to see this.  I’ve also found find that easy money on the table for the trustee can entice them to overlook “tougher” liquidation challenges.  Of course, this also means that, based on Beezley, in the 9th Circuit you must stress to your clients the importance of listing ALL potential claimants to obtain full benefit from the discharge.