What to do?  I would say that filing the bankruptcy case, as long as all assets are disclosed, has very little chance of leading to prosecution for illegal possession and cultivation.  The federal government has pretty much given up the fight against medical marijuana growers and dispensaries that are otherwise legal under state law.  But, such marijuana could be considered a valuable asset.  It seems like an unlikely proposition that a trustee would actual attempt to administer a marijuana crop by selling the asset for the benefit of creditors. However, I think the good advice here is to file the case only if the asset can be fully disclosed and fully exempt and simply avoid the issue.  A debtor usually has the choice of timing of the filing of the bankruptcy case.  I would recommend to only file when the assets have been consumed or otherwise disposed of in the ordinary course of the business and affairs of the debtor.  This could simply be after the debtor has sold some of his or her crop and spent down the proceeds to below the  exemption threshold that applies in the particular case.  Maybe it is time to invest proceeds into an IRA or other asset where a larger exemption might be available.

Exemption planning is best done with a competent lawyer. Of course, if you have literally consumed the assets by smoking them, then exemption planning might not be necessary.   Now, get off the couch and call attorney Marty K. Courson at 415-433-3100 for bankruptcy exemption planning and for all of your consumer bankruptcy needs.

For consumer debtors, the mean test (I mean “means” test), requires consideration of a variety of factors including family income, secured debt, taxes, and a cavalcade o f other factors.  Depending on the amount of “disposable income” that remains after deducting means-test authorized expenses, you could find that you are simply not qualified for a Chapter 7 or that you have to invest an inordinate amount of money in a Chapter 13 or Chapter 11 bankruptcy.

But what about the children? Surely college expenses for my children are deductible from my income?  Nope. Not according to Congress when it devised the means test.

Here are some of the items that are deductible when it comes to determining disposable income:  1) Contributions to the support of an elderly, chronically ill or disabled member of your family, 2) Continued contributions to a charitable organization, 3) Your Mercedes payment, 4) The debt you pay on your vacation home, and 5) the debt you pay on your ridiculously over-encumbered house.  You could spend all day listing other bona-fide deductions.  But deductions for your college-age children?  Nada.

That is, unless you have a court order to pay such expenses.  The means test specifically permits a deduction for payments required pursuant to court order, such as spousal or child support payments.  A Massachusetts bankruptcy court addressed this very issue in In re Maiorino, (Bankr. D. Mass. 9/1/10).   In the Maiorino case, the debtor had a state court order that incorporated an agreement with his former spouse and that “requires the Debtor to be solely responsible for the reasonable college expenses and college-related expenses of his two children. These expenses include tuition, room and board, and other ancillary expenses.”  Because these expenses are clearly within the Bankruptcy Code’s definition of a domestic support obligation, the court found these court-ordered expenses to be appropriate deductions when computing the means test.

So what is the moral of this story? If you love your children, but loathe your spouse, getting divorced now may help in the long run!  Your family, broken as it may be, will quite possibly benefit considerably.

Call attorney Marty K. Courson at 415-433-3100 to schedule a free consultation for bankruptcy (Sorry though, you will have to find a divorce lawyer on your own!)

Two cases came down recently relating to money paid by defendants in criminal proceedings.  One of the cases dealt with a $75,000 payment in relation to a plea bargain.  The other case dealt with restitution payments that the defendant made as required by the criminal court.  Both of these individuals subsequently filed bankruptcy. At its heart, the bankruptcy laws are (supposedly) designed to make sure that creditors are treated fairly in relation to one another.  Therefore, the bankruptcy code permits certain payments made to a creditor that got an unfair preference to be recovered and then redistributed evenly to all creditors.  11 U.S.C. § 547.  There are a lot of rules that apply on what makes any given preferential payment recoverable in a bankruptcy case.  One of those rules is the rule of “new value.”  It goes basically like this:  If I pay a creditor money, but then the creditor gives me “new value” at the time I pay them, it is considered a contemporaneous exchange and thus the money I have paid that creditor is not subject to being recovered by a bankruptcy trustee.  However, if I just pay a creditor money that is outstanding on a debt, and I don’t receive any contemporaneous exchange of “new value,” the money I paid might be recoverable by a bankruptcy trustee.  In a case out of New York, the court held that a bankruptcy debtor received the benefit of a plea bargain when he made a $75,000 payment.  The plea bargain was the “new value” that he essentially paid for.  Thus, the bankruptcy court held that the $75,000 was not recoverable by the debtor’s bankruptcy estate.  In re Citron, Bankr. E.D.N.Y, August 18, 2010. In a case closer to home, the Ninth Circuit held that criminal restitution payments could be recoverable if they meet the statutory requirements of the preference provisions of the bankruptcy code.  In re Silverman, (9th Circ. filed August 12, 2010).  In the Silverman case, the debtor had been convicted of insurance fraud and had been ordered to make criminal restitution payments to the State Compensation Insurance Fund.  The argument in that case was that the payments were for the benefit of society as a whole and not for the benefit of a actual creditor (one of the requirements under the code for avoiding a preferential transfer).  The court held that the payments could be recovered by the trustee.  In re Silverman.Criminal restitution payments are not dischargeable in either a Chapter 7 or Chapter 13 bankruptcy case.  This means that debtors have an incentive to pay restitution creditors in preference to ordinary creditors.  As the Silverman court observed, “Excepting criminal restitution payments from § 547(b) [the preference provision] would, therefore, motivate debtors to pay off these non-dischargeable debts during the preference period, leaving all other debts to be extinguished in bankruptcy. An economically rational debtor would likely prefer this outcome over one where the debtor is left with non-dischargeable debts post-bankruptcy.” Sadly, paraphasing the language in the Silverman case, for the debtor who had made the criminal restitution payment, the Trustee’s recovery of the restitution payment would not eliminate the debtor’s obligation to pay the restitution money post-bankruptcy; they are stuck with the obligation until the debt has been fully satisfied.

What is the moral of the story for an immoral criminal debtor?  Pay your restitution fines outside of the preference period so you can make the payment stick!

Assuming you are out of jail, call Attorney Marty K. Courson at 415-433-3100 for debtor bankrutpcy representation.

Boiled to its essence, the amount of the “homestead exemption” is the amount that a judgment creditor would have to PAY YOU from a forced sale of a dwelling.

Forced sales of real property to pay unsecured judgment creditors are rare in a down real estate market as a court won’t give permission if there is insufficient money to pay for the costs of sale, property taxes, superior lien interests AND the value of the available homestead exemption.

The homestead exemption is a very important consideration in a bankruptcy case.  Just like a judgment credito r, a trustee in bankruptcy can force the sale of a home if there is enough equity.  Where the exemption comes into play is when there is “realizable equity” in a home.  In a Chapter 7 bankruptcy case, a trustee is assigned whose job it is to liquidate assets for creditors.  However, the trustee does not just sell a person’s home on the fly.  Rather, the trustee determines what kind of proceeds could be obtained for distribution to unsecured creditors if a home was hypothetically sold.

For example, if I was 66 years old, I could exempt $175,000 in equity in my home.  But what does this mean in practical application?  If my home was worth $600,000 on today’s market (called “fair market value”), and I had combined mortgage and property tax debt of $400,000, there would potentially be $200,000 in equity.  BUT THIS DOES NOT MEAN THAT MY HOUSE WOULD BE SOLD IN A BANKRUPTCY CASE.  This is because we also consider the costs of sale and the exemption available.  The costs of sale on a home worth $600,000 would be about $36,000.  After subtracting the costs of sale, the net realizable equity would be about $164,000.  Because this does not leave enough money to cover the $175,000 homestead exemption in this example, the house would not be liquidated (i.e., sold) in a bankruptcy case.

People rarely “lose their home” in a bankruptcy case!  The main reason that people “lose their home” is that they cannot afford their monthly mortgage payment and they are foreclosed.  In those circumstances where there is some equity in a home that would cause a sale in a Chapter 7 bankruptcy case, a person might be well advised to file a Chapter 13.  A Chapter 13 can be designed to permit retention of the dwelling if the plan payments are sufficient.  A chapter 13 might also be used to help play “catch-up” on overdue mortgage payments.

Each situation is different and requires a nuanced analysis by an experienced bankruptcy practitioner.  Call Marty Courson at 415-433-3100 to schedule your free consultation.