Can a Bankruptcy Filing Be "Expunged?"

A special thanks to our summer intern Mike Burgher in his assistance with preparing this article!

Expungement — Civil action lawsuit with the objective of eliminating from public record any criminal conviction.  Law on subject varies between states.  State Law for Michigan found under Chapter 780 in the Michigan Legislature.  Process and application for expungement found from 780.621 – 780.624.  Expungement is unavailable for criminals convicted of sexual offense under M.C.L. 750.520c, 750.520d, or 750.520g, a felony/attempted felony punishable by life imprisonment, a traffic offense, or if person has other prior convictions or convictions that had previously been set aside.  The process for an applicant convicted of a criminal offense must follow the steps listed from the following link (http://expungement.uslegal.com/expungement-of-criminal-records/michigan-expungement-law/)

Because bankruptcy is classified under a non-criminal offense and considered a voluntary action by the declaring party, expungement authority is unclear and decided on the discretion of the Judge for the individual case.  The U.S. Bankruptcy Code does not grant the Court any specific powers in these instances, nor does it offer much direction on how to proceed when a Bankruptcy Expungement case is brought before it.

The following cases show various rulings by the Court on different circumstantial hearings:

In re Buppelmann, In re Fountain (Pennsylvania, 10/18/2001)

This case ran in two parts.  The first part was between Helmet and Marguerite Buppelmann, and their attorney Eric Levande.  Helmet said he and his wife had signed a document that was attached to a list of creditors on 5/29/1996 due to medical bills incurred by Marguerite.  She passed away in early 1997, prompting Helmet to tell Levande not to file for bankruptcy.  But on 10/15/1997, Levande filed the documents for bankruptcy using forged signatures.  The case was dismissed because Helmet did not appear at his § 341 hearing.  Helmet wished to have his case expunged from public record.  The Court did not expunge the bankruptcy case, but instead indicated in the dismissed case file that the original filing of the case was due to fraud from Levande (or a party other than the Debtor) so as to alert creditors the reason for the bankruptcy filing.

The second part included Robert C. Fountain, who signed a petition in bankruptcy because of an arrangement between himself and Homeowners Rescue Service, with the understanding that the petition would not be filed unless he authorized it as a “last resort.”  He neither instructed the agent to file the petition, nor did he tell the agent not to file the petition.  The bankruptcy was initiated on 10/1/1998. For this reason, he wanted his case expunged.  The petition was later dismissed for not having all the required schedules.  The Court did not rule in favor of Fountain, citing that turning over a legal document to an agent made the assumption that the document could be filed at the convenience of the agent, and that the document contained no amount of fraud.

This case established a three-pronged course of action outline for dealing with Bankruptcy Expungement.  The 1^st course of action the Court could take for Buppelmann was to grant the request for expungement and destroy the related documents of the bankruptcy from public record.  The 2^nd course would be to add a notation to the filing petition indicating that the petition itself was fraudulent and occurred without consent from the debtor, for use by future creditors.  The 3^rd course was to order the court Clerk to delete all references to the debtor’s name(s) on all of the case dockets.  As seen in the first part of the case, the Court chose the 2^nd course of action.

In re Storay (South Carolina, 11/22/2006)

Johnny and Patricia Storay brought a case against their bankruptcy attorney, Blaine T. Edwards, citing that Edwards filed a bankruptcy case under the couple’s name without proper authority from either persons.  They sought to have attorney’s fees returned to them and have the bankruptcy case expunged.  The bankruptcy case had been filed 10/16/05 and dismissed 11/29/05 due to a “failure to file documents required by Title 11.”  The Court ruled in favor of the Storays, who were awarded the amount paid in attorney’s fees and had the case expunged based on inconsistencies between actual petition and electronic petition filed, and based on the testimonial of Patricia Storay.  Court used power granted from § 105 and§ 107 of Bankruptcy Code in the ruling.

In re Joyce (Delaware, 1/6/2009)

Robert F. Joyce filed a voluntary petition for a CH 7 Bankruptcy on 10/13/03, which was discharged on 1/21/04.  He claimed that he was filing the petition, in-part, due to a loss of $1,285 from a loan scam he applied for out-of-country because he was already in financial trouble and wanted to avoid bankruptcy.  He argued the scam sent him deeper in debt and that the false company had also stolen his identity.  However, Joyce admitted multiple times that all creditors listed on his Schedule F on the bankruptcy petition had been “personally incurred” and not a result of the fraud.  On 9/2/08, Joyce filed the motion asking the court to expunge his bankruptcy from public record.  The Court ruled against Joyce, citing that no other charges were made that hurt Joyce’s finances after he gave his information to the loan scam, and all charges were personally incurred as part of his voluntary bankruptcy filing prior to the scam taking place.

Do I Have to Pay Taxes on This? 1099-C's After Bankruptcy

A common question I receive around this time of year from bankruptcy clients involves the receipt of a 1099-C from a creditor that was discharged in their bankruptcy. This can be a pretty stressful piece of mail to receive, especially as that client has already gone through the bankruptcy process to wipe their slate clean only to face the prospect of an obligation to the IRS. 

Generally speaking, a 1099-C is a tax form sent to you from a creditor that forgave debt of more than $600.00 to you in that taxable year. That creditor (and you) are required to report that information and income to the IRS. For individuals that have discharged that debt in bankruptcy, there typically is no tax liability for this amount. That does not mean, however, that you can just ignore the 1099-C.

What should you do with a 1099-C for debt that was included in bankruptcy? In addition to filing your form 1040 to the IRS, you also need to attach Form 982 to your tax return. This form notifies the IRS that you are not adding the cancelled debt from the 1099-C to your gross income on your tax turn because of the bankruptcy filing.

If you receive a 1099-C for debt that was secured by property (i.e. a car loan or mortgage) the issue becomes a little more complex. Yes, more likely than not you can exclude the forgiven debt from your gross income. The IRS, however, still will treat the cancelled debt if the house is foreclosed on, as though you sold the house. In other words, the IRS will want to know if there was a gain or loss on the property. Generally speaking, a taxable gain happens when you own property and that property sells for more than you purchased it for or more than your tax basis. This can result in having to pay taxes to the IRS.

Going through bankruptcy can be a difficult and frustrating experience. The benefits of a successful bankruptcy, however, can be significant. Don’t let an errant 1099-C hamper your bankruptcy discharge and put you right back into debt.

If you receive a 1099-C for a debt included in your bankruptcy, contact us for a free consultation on the possible impact that document may have on your income tax returns. 

Famous Bankruptcies: Abraham Lincoln, Bankruptcy Debtor

I was working on a presentation for a local seminar the other week on the basics of bankruptcy. I covering the different types of bankruptcies, I was trying to provide a small sample of "famous bankruptcies;" or bankruptcies of people that, by common perceptions, were/are considered to be successful. As a history major in college, I dove into the project head first and was very surprised at the results that I found.

So who filed? Presidents? You bet (and more than one!). Actors? Absolutely. Musicians? Of course....

I thought this would be an interesting topic to write about on this blog (also as an attempt to get back in the saddle of updating this). I'm going to try to do a regular post on the details of at least one famous bankruptcy.

So, without further adieu:

ABRAHAM LINCOLN, BANKRUPTCY DEBTOR

Ask anyone in the world to name three US presidents and Abe Lincoln more than likely will be one of them.

Ask any American to name the three most important US presidents and I'll be that he will come up again.

The image of a stoic, giant, man with anecdotes, wisdom, and the leadership to guide our nation through arguably its most trying times is seared into our collective conscious.

But....

He filed for bankruptcy. 

Lincoln's bankruptcy filing occurred in 1833; long before the time of PACER and electronic records. I'm sure you can imagine that the existing records are somewhat hard to come by. Here is what I can piece together:

In 1833 Lincoln and an Army corporal by the name of William Berry purchased a general store in New Salem, IL. Lincoln signed a note with the seller of the business to finance its purchase. The business, however, competed with a much larger, well established company, and soon folded.

Within the next year, the note became due and Lincoln was unable to pay. His possessions were soon possessed by the local sheriff. Soon, Corporal Berry died and Lincoln assumed his 1/2 of the debt. Lincoln filed a form of bankruptcy that existed at the time and had to make payments on the debt. Some say he paid for seventeen years. Others argued it wasn't quite that long. 

Shortly after the bankruptcy filing, Lincoln obtained a job as a postmaster and then as a surveyor. I would say that he recovered from his "National Debt," as he liked to call it, rather well.

A Little Shameless Self-Promoting - Home Buying Seminar - FREE JANUARY 25

On Saturday, January 25, 2014 I've been asked to present at a home buyer's seminar in Pontiac. The focus of the seminar is to address potential buyers that think they cannot qualify to purchase a home. Sessions will be taught on the following topics:

(1) Credit Reporting and How it is Caluculated
(2) Consumer Bankruptcy Basics (this is my session)
(3) HUD Housing
(4) New FHA Program to help distressed buyers
(5) MLSDA Loans.

For a potential homebuyer, there will be a treasure trove of information to assist you in the daunting process of buying a home.

For the real estate professional, it this seminar is an excellent opportunity to network with other professionals in the area --- and you might learn something that you didn't know!

Did I also mention that there is free breakfast?

Hope to see you there! Sign up here.

What is a Chapter 7 Bankruptcy?

There are several types of bankruptcy that exist under Federal Law. Each type of bankruptcy is identified by the "chapter" of the bankruptcy code that lays out its rules.  I hope to write about each of these "chapters." Chapter 7 seems like the best place to start.

Chapter 7 bankruptcy is commonly referred to as a “straight” or “liquidation” bankruptcy. Of all bankruptcies filed in the United States, Chapter 7 is the most common. In a typical Chapter 7 case, an inventory is taken of the debtor(s)’ assets as of the filing date. This property is considered to be the debtor(s)’ “estate.” Once the estate is established, local (state) law allows for different exemptions to be applied to the property of the estate. An exemption essentially removes equitable value of property  from the estate and allows that interest to continue to be vested in the debtor. Any estate property that is not exempt is then liquidated and the proceeds distributed to the debtor(s)’ creditors.

The typical Chapter 7 debtor is an individual or married couple that has low monthly income and moderate to minimal assets. In order to qualify, the debtor’s annual household income must be at or below the median income for a household of their size in the state in which they live. This is commonly referred to as the “means test.” Current  figures to establish the median income for Michigan are available on the United State’s Trustee’s website.

In a Chapter 7 bankruptcy, the personal obligation to all of the debtor(s)’ debt is subject to discharge with a couple exceptions. This rule applies to credit cards, medical bills, and even mortgages. Chapter 7, however, does not relieve the debtor(s) of the lien that attaches secured debts to their collateral. For example, a debtor with a mortgage secured by their home would not be liable for their mortgage payment and the mortgage company could not pursue that individual for any money owing on the note. The mortgage company could, however, still foreclose on the property if payments are not made.

If you are considering filing for bankruptcy, please consult the professional advice of a knowledgeable attorney before proceeding.

Bankruptcy and Foreclosure: How Bankruptcy Can Help You Save Your Home

If an individual  is faced with imminent foreclosure or financial issues regarding real property, bankruptcy  through either Chapter 7 or 13, can present significant loss mitigation tools.

Chapter 7 can be extremely effective in relieving the monetary obligation of an individual that no longer wishes to keep his or her home. Often a individual will have attempted to short sale the property prior to considering any bankruptcy option. Those attempts can be unsuccessful, or undesirable inasmuch as the lender may require the individual sign a note to pay any deficiencies on the mortgage as a condition of the sale. Consequently, discharging the mortgage obligation prior to a short sale, puts the homeowner firmly in the driver’s seat when it comes to dealing with lenders  in the short sale process.

The options available in Chapter 7, however, pale in comparison to the tools at the disposal of the creditor in a Chapter 13 bankrupcy. Chapter 13 bankruptcy is typically referred to as a “paying” bankruptcy. The essential purpose of the Chapter 13 bankruptcy is to avoid liquidation of assets in a Chapter 7 case and allow the debtor(s)’ to reorganize their affairs. This almost always includes monthly payments for a period between 36 and 60 months composed of the debtor(s)’ disposable monthly income. There is not a “means test” for the purposes of determining eligibility for Chapter 13, rather it is only required that the debtors have income.

It is important to emphasize that the timing of a Chapter 13 petition is everything in relation to distressed real estate. If a foreclosure is in process, a Chapter 13 petition must be filed before the date of the Sheriff’s Sale in order to give the homeowner any shot at retaining his property.

The first (and most common) tool that a Chapter 13 debtor(s) would have at their disposal is the ability to cure arrears on a secured debt. If a homeowner has fallen behind on their payments, has been denied a modification, and wishes to keep their home, the arrears on the mortgage can be divided into 60 payments to cure the deficiency. The debtor would be required to make their current monthly payment and then in addition to that monthly payment, they would pay a portion of the arrears. At the completion of their Chapter 13 plan, the debtor will have made progress on the current balance of the mortgage as well as cured any arrears. The only requirement is that the debtor be able to make the monthly payment required.

Second, an individual that has more than one mortgage on his principal residence may be eligible to “strip off” or remove the lien the property created by junior mortgages.  In order to qualify for this relief, a principal residence must have at least two mortgages. The value of the home, as determined by a recent appraisal, has to be at or below the amount owing on the first mortgage. Effectively, this makes any junior mortgage “wholly” unsecured. As a result, the junior mortgage is treated in the Chapter 13 bankruptcy as an unsecured creditor that may only get a fraction of the amount owed to it through the Chapter 13 plan. If the debtor successfully completes their plan and receives a discharge, the lien is removed from the property. The end result is that the Debtor will have been making monthly payments on the first note, while at the same time, they will have removed junior liens, often leaving them with equity in their home.

Third, an individual may be able modify short term mortgages or “balloon payments.”  Under section 1322(c)(2) the bankruptcy court is permitted to modify mortgages on which the final payment becomes due during the course of the Chapter 13 Plan. Often, this arises in the instance of balloon payments. As a result, the individual would be able to modify the terms of that mortgage, including payment, interest rate and treat the unsecured portion of the debt as an unsecured creditor in the Chapter 13 Plan, effectively “cramming down” the mortgage to the value of the property.

Fourth, an individual may be able to modify mortgages that are secured by property, including the individual’s principal residence, and any other property under the plain language of 1322(b)(2). It is not uncommon for a mortgage to secure, in addition to the real estate, other items such as household goods, bank accounts, or even other property. Courts will examine whether the agreement provide for security in other collateral that provides an additional interest other than an existing component of that creditor’s security interest in the property. In 2005, congress also added language to 1322(b)(2) that exclude from modification, liens that secure the property and “incidental property.”

Ancillary to a cross collateralized mortgage, a mortgage may be modified in Chapter 13 if it is secured by a multi-family residence or a combined residential and commercial property. The restriction on anti modification claim applies, only to the debtor’s principal residence. Much like the exclusion for debt that is secured by real estate and other property, a multi-unit property can be also be modified.

Finally, a lien may be modified or removed if it is not a “security interest” in real property. A “security interest” in real property is defined as a lien created by agreement. Consequently, a lien created through the judicial process or that is statutory is subject to modification in Chapter 13.

 

Can a Spouse Strip a Joint Junior Mortgage in an Individual Chapter 13 Plan?

One of the benefits to some individuals in filing for Chapter 13 is the possibility of "stripping" or removing a second mortgage lien from the property through the completion of their Chapter 13 Plan.

Typically, such cases are filed as adversary proceedings (at least in the Eastern District of Michigan), which essentially is a lawsuit in the bankruptcy proceedings, by the property owners against the mortgage company. The process by which this occurs is, in and of itself, a whole topic to be covered in a later blog post.  The issue is, however, whether an individual spouse strip a joint lien when the other spouse has not filed bankruptcy. It would appear, that at least in the Eastern District of Michigan, the answer is "yes."

For purposes of this discussion, lets assume that Client A is married.  She and her husband have two mortgages on the property that they own as tenants in the entirety. The value of the house and the amount due on each mortgage indicate that this case is ripe for a lien strip proceeding in a Chapter 13 petition. Does the spouse (who is still on the mortgage and note) have to file Chapter 13 as well in order to get the lien strip?

In most jurisdictions, the answer would be "no."Several courts have held that a non-filing individual is not allowed to reap the benefits of bankruptcy without paying the costs of bankruptcy.  In re Hunter, 284 B.R. 861, (Bkrtcy E.D.Va 2002). Others have held that to allow a lien strip to occur where one of the legally responsible parties has not filed bankruptcy is a violation of the mortgage lien holder's due process rights. In re Erdmann, 446 B.R. 861 (Bkrtcy N.D.Ill 2011).

In In re Strasborough, 426 B.R. 243, Bkrtcy E.D.Mich 2010), the Eastern District of Michigan was presented with the question of whether an individual can strip off a second mortgage in a Chapter 13 Plan, even if her jointly liable, non-filing spouse was not a party to the action. Judge Steven Rhodes held that debtors acting alone and with no participation by non-debtor spouses, could avoid junior mortgage liens on homestead property that is held by tenants in the entirety. Judge Rhodes rejected the analysis set forth by In re Hunter by looking at Congressional intent: Did Congress intent to allow the avoidance of a junior lien on entireties property when only one spouse files? Since the language of the statute is silent on the issue, Judge Rhodes held that the avoidance of junior lien on entireties property is consistent with entireties law.

Strasborough thus allows, Michigan, one spouse to file Chapter 13 and allow a spouse that is a joint mortgage holder to not file, and still allow a lien strip to occur.