Bankruptcy

To The Carpenter, Everything Looks Like A Nail. To Some Bankruptcy Attorneys, Filing Bankruptcy Is The Best Solution For All Debtors.

By Jonathan Alper

There is the well-known proverb that, to a carpenter everything in the world looks like a nail. Or, surgeons want to operate to cure any and all ailments. The same is applicable to some bankruptcy attorneys. I assisted a couple with asset protection last year. The couple faced joint liability from a failing business investment. They had $150,000 liquid cash, and they were expecting another $200,000 from the proceeds of a real estate sale. I explained that they would lose the cash in bankruptcy. I advised them to spend down the cash and possibly invest in a new homestead which would be exempt I they were sued.

Since my advice, the creditor sued and obtained a judgment against the couple. The couple too al their liquid cash remaining, about $310,000, about bought a $400,000 homestead with a small mortgage. The creditor began aggressive collection efforts. The collection fight made the couple nervous and fearful about their assets so they consulted a bankruptcy attorney with the hope of putting the problem behind them.

As the couple reports, the bankruptcy attorney told them that the money used to purchase the house was not exempt in a Chapter 7 bankruptcy first, because the amount of equity invested in the homestead exceeded the bankruptcy exemption(about $275,000) permitted within 40 months of purchase, and two, because the conversion of substantially all their cash to a homestead could be attacked as a fraudulent conversion in bankruptcy. He told these people to file a Chapter 13 bankruptcy so that their house would not be liquidated and they could pay only their available monthly cash flow to their creditors.

I think Chapter 13 bankruptcy would be a poor idea for these debtors. In a Chapter 13 bankruptcy the debtors have to pay through a five year plan not only what they clear each month after reasonable expenses but also all the money their creditors would have received in a Chapter 7 liquidation. If these people had filed Chapter 7 the trustee would have claimed as non-exempt part or all of the $310,000 they invested in their homestead. The non-exempt homestead equity (it could be all if seen as fraudulent conversion) would still have to be paid to the Chapter 13 trustee during a five year plan. In any bankruptcy, 7 or 13, their homestead equity is at risk.

If they simply stayed far away from bankruptcy as I had originally advised their creditor had no way to attack any of their homestead exemption in state court collection. I think their bankruptcy attorney pushed them to Chapter 13 because bankruptcy is the only tool in his legal toolbox- just like the carpenter or the surgeon only uses the tools he is comfortable with. The bankruptcy attorney failed to appreciate that these people had better legal protection tools outside of bankruptcy court.

For most people heavily in debt bankruptcy is the only tool to fix their situation. People with assets should get a second and even a third opinion before filing bankruptcy. Bankruptcy filings are usually irrevocable- once you go in you cannot get out.

Full post as published by Florida Bankruptcy Law on August 12, 2010 (boomark / email).