Articles Posted in Chapter 13 Bankruptcy

Bankruptcy clients who are new to Florida come to our office complaining about what I call the Exemptions Calculus Problem. Learning calculus seems simpler. Below are some useful sites and a brief explanation as to how exemptions work.

First, exemptions in bankruptcy are important because they decide what you get to keep in a bankruptcy. In Florida, we have very strong homestead exemptions and retirement asset exemptions for an IRA, 401k, 403(b) or annuities. Not so much for personal property unless you are surrendering your home and can claim a $4,000 wildcard exemption in addition to a $1,000 exemption. Vehicles are allotted a $1,000 equity exemption. Anything more, you have to pay to keep or give up.

However, the rules vary dramatically when you have lived in Florida for less than two years. Then we either use the state’s exemption where you moved from or the federal exemptions. Ironically, you cannot use the federal exemptions when you have lived here for two years or more, because Florida has opted out of the federal exemptions. Federal exemptions provide a very generous personal property exemption.

In an article recently about shedding second mortgages, I am reminded that many people still do not realize that they can often strip their second mortgage forever in a Chapter 13 Bankruptcy. Although this article addresses homeowners in California, the same is true for our Florida clients.

The key is that your bankruptcy attorney has to show that your home is worth less in today’s market than the balance of your first mortgage. You do not have to be behind in your payments. You do not need the permission of the second mortgage company. Your attorney simply files a motion with the court to determine secured status, attaches exhibits of valuation (which can vary from the most recent tax assessment, a BPO, an appraisal or even comps), and waits to see if the mortgage company objects. Often, they do not bother or they consent. If they do fight it, the court will set an evidentiary hearing to determine the value if the bank brings evidence that the value is higher. Then you get into the dueling appraisal war. None of our cases have gotten that far and we’ve probably stripped off 50 2nd mortgages in the last couple years.

This is one way to drop your principal balance if the banks won’t agree. It may be the only way to save an underwater home and get back to paying its real value. It doesn’t matter what the second mortgage was used for, whether it was an 80/20 loan, or used to fund start up costs for a business, or payoff credit card debt or cars.

Finally, a win in the Florida Supreme Court for bankruptcy debtors. In February, the Osbourne v. Dumoulin decision puts to rest an issue in Florida where judges disagreed on how much personal property a debtor could keep when filing bankruptcy. Generally a debtor using Florida state exemptions can keep $1,000 in personal property. They can retain additional personal property, but they have to pay to keep anything above the exempt amount. However, if a Florida debtor is not claiming a homestead exemption, they can claim a larger $4,000 wildcard exemption to protect additional personal property such as bank accounts, equity in vehicles etc.

Even our four bankruptcy judges in Tampa, Florida disagreed on how to apply the wildcard exemptions in cases where the home was underwater. After Dumoulin, in cases where the debtors own a home that has negative equity, they can now claim an additional $4,000 wildcard exemption to keep additional personal property. This can be very valuable since Florida’s personal property exemptions are one of the lowest in the country. Most people haven’t minded too much because Florida’s homestead and IRA/401k exemptions are very favorable to debtors. But nowadays, many people have negative home equity and have cashed out or borrowed against their 401ks and don’t receive the benefit of those broad exemptions.

Application of exemptions can be complicated especially in cases where the debtor has recently moved from another state, please consult with an attorney regarding the proper use of exemptions. Arkovich Law

Florida’s Middle District which covers Tampa, Orlando, Fort Myers and Jacksonville was second only to the Los Angeles district in bankruptcy filings from October 2009 to September 2010. The Florida Middle District recorded 66,861 bankruptcy filings including all chapters.

That translates to approximately one person out of 100 in these two districts declared bankruptcy last year, based upon a 2009 U.S. Census.

The downturn that began in 2007 has led to an increased number of bankruptcies. The decrease in home equity made people feel less wealthy and they are more apt to file bankruptcy when the credit card debt seems overwhelming. No longer is equity available in homes to tap in an effort to pay down unsecured debt such as credit cards. Realizing this, many people have come to the conclusion that bankruptcy is their way out. Also Americans are coming to realize that the social stigma of filing bankruptcy has nearly disappeared.

A January 11, 2011 opinion by the U.S. Supreme Court is expected to drastically increase potential disposable income in Chapter 7 and 13 bankruptcy cases in Tampa, Florida. This may cause someone who previously qualified for a Chapter 7 bankruptcy not to qualify, or to increase the Chapter 13 plan payment by $500.

You see prior to Ransom v. FIA Card Services, N.A., our local (often considered debtor friendly) Tampa Division would generally allow a $496 ownership credit toward a vehicle (two credits were allowed if debtors were married or had reason for an additional vehicle). This $496 credit would be allowed even if the car payment was less than $496 or if there was no car payment and it was owned free and clear. A debtor only needed to own or lease a vehicle to claim the ownership credit. A separate credit is used for vehicle operating expenses. The reasoning in the Tampa Bay area was in part if the debtor was driving an older paid off vehicle, at some point during a 3-5 year plan the debtor would have to purchase a replacement vehicle. Allowing the credit would permit the debtor to both save some money for the down payment as well as afford the payment when the replacement vehicle was purchased.

Following the 8-1 decision in Ransom, our local Chapter 13 Trustees and Judges can no longer allow a debtor to reduce disposable monthly income (DMI) by claiming a vehicle ownership expense when the debtor has no associated loan or lease payment for the vehicle. In some other areas of Florida or elsewhere around the country, debtors already were not allowed to claim the expense, so this won’t have any effect on them. But here in Tampa, this is a major disappointment.