Consumer Bankruptcy

Joining the majority of courts, in In re Salpietro, the United States Bankruptcy Court for the Eastern District of New York held that a post-petition review of the debtor’s net disposable income was not required under the Bankruptcy Code and did not provide the basis for an upward modification under section 1329(a).[1] There, the debtors confirmed joint chapter 13 plan that provided that the “future earnings of the debtor [were to be] submitted to the supervision and control of the trustee.”[2] After making timely payments for five years, the debtors moved to approve a loan modification that would essentially reduce their monthly mortgage expenses by approximately $970.[3]In response, the chapter 13 trustee cross-moved to increase the debtors' payments under their plan on the grounds that the decrease in the debtors’ expenses constituted “future earnings,” and therefore, under the plan, were to be “submitted to the supervision and control of the trustee.”[4] However, the court disagreed and denied the trustee’s motion for upward modification, holding that: (1) section 1325(b)’s projected disposable income test does not apply to modifications under section 1329, and (2) section 1322(a)(1) did not provide a basis for upward modification because the reduction of the debtor’s mortgage expenses did not constitute additional income or earnings.[5]

Residency for the Purposes of Applying State Exemption Laws Must Be Analyzed as it Existed on the Petition Date

By: Christopher McCune

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In the Matter of Willis, the Bankruptcy Court for the Western District of Wisconsin decided that under section 522(b)(3) of the Bankruptcy Code, a debtor must be domiciled in a given state at the time of filing a bankruptcy petition in order to access—or be bound by—that state’s exemption laws.[1] In Willis, the debtors claimed the federal exemptions in their bankruptcy petitions, rather than attempting to assert any state exemptions.[2] The debtors resided in two different states during the 730-day period immediately preceding the filing of their bankruptcy petitions; they were domiciled in Illinois first, and then moved to Wisconsin.[3] Going back further, the debtors were domiciled solely in Illinois (an “opt out” state) during the 180 days prior to the aforementioned 730-day period.[4] However, the debtor’s were domiciled in Wisconsin at the time that they filed their petitions. Due to that fact, the court ruled that Illinois’ exemption laws did not apply, notwithstanding all of the time the debtors spent domiciled there.[5] However, since the debtors also had not been domiciled in Wisconsin for the requisite number of days prior to filing the petition, they also could not invoke the state exemption laws of their current residence, even if they wished to.[6] Faced with no applicable state law exemptions, the Willis court found that the debtors were therefore necessarily entitled to claim the federal exemptions.[7]

Translating Section 362(c)(3) What Gets Terminated

By: Michael C. Aryeh

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Adopting the majority approach, in In re Williford, the Bankruptcy Court for the Northern District of Texas held that the plain meaning of the phrase “with respect to the debtor,” found in section 362(c)(3)(A) of the Bankruptcy Code, limits the termination of the automatic stay to the debtor and the debtor’s property, and the automatic stay does not terminate the stay with respect to the property of the estate.[1] In Williford, the debtor and his wife executed a deed of trust to a secured creditor, placing a lean on their real property.[2] At some point, the debtor defaulted on the note, the secured creditor served the debtor with a notice of acceleration and foreclosure.[3] In response, the debtor filed for bankruptcy under chapter 7, but the case was subsequently dismissed due the debtor’s failure to file certain information with the bankruptcy court.[4] Following the dismissal, the creditor again began serving the debtor with foreclosure notices.[5] The debtor then filed for bankruptcy under chapter 11 within a year of the dismissal of his previous chapter 7 case. [6] The debtor, however, failed to file a motion to extend the automatic stay within the 30-day window provided for in section 362(c)(3)(A).[7] Thirty-five days after the debtor filed his second case, the creditor moved to confirm that the automatic stay was “terminated.”[8] The next day the debtor moved to extend the stay.[9] The court denied the debtor’s motion.[10] The court, however, agreed with the debtor that section 362(c)(3) did not terminate the entire automatic stay and, instead, only terminated the stay with respect to the “debtor’s property.”[11]

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Self-Settled Trusts Choice-of-Law Difficulties under Restatement 270

By: Christian Corkery

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Applying Washington law, the United States Bankruptcy Court for the Western District of Washington in In re Huber held that prepetition transfers of the debtor’s assets to a self-settled trust created under Alaska state law were void under Washington law.[1] The matter before the court involved a debtor who created a self-settled trust in Alaska to protect his assets from creditors. Because Washington state law does not recognize self-settled trusts, the debtor created the trust in Alaska under Alaska state law, which permits self-settled trusts. The trust agreement included a choice-of-law provision which stated that Alaska state law would govern all legal disputes.[2] After the trust was created, the debtor filed for bankruptcy.[3] The chapter 7 trustee brought an adversary proceeding seeking to recover the assets that the debtor transferred to the self-settled trust and to deny the debtor a discharge.[4] The court declined to apply Alaska law because Washington had a public policy interest against self-settled trusts, and Alaska did not have a substantial relation to the trust.[5] The debtor was not domiciled in Alaska, his assets were not located in Alaska, and the trust’s beneficiaries were not domiciled in Alaska.[6] The court found that Alaska’s only connections were that it was the location of where the trust was to be administered and the location of one of the trustees.[7] As such, the court applied Washington state law which states that transfers made to self-settled trusts are void as against existing or future creditors, and therefore, the trustee was able to recover the assets.[8]

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Treatment of Non-Spousal Inherited IRAs in Bankruptcy

By: Kimberly Tracey

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Clark, the Court of Appeals for the Seventh Circuit adopted a new approach to the treatment of non-spousal inherited IRAs in bankruptcy cases. The court reversed the decision of the District Court and found that a debtor could not exempt a non-spousal inherited IRA.[1] In Clark the debtor sought to exempt an IRA she inherited from creditors’ claims under section 522(b)(3)(C) and (d)(12) of the Bankruptcy Code.[2] The bankruptcy court held that the inherited IRA was not exempt because the account did not represent retirement funds in the hands of the debtor.[3] The district court reversed, adopting the view that since the inherited IRA constituted “retirement funds” in the debtor’s mother’s hands, the account must be treated the same way in the debtor’s hands.[4] Reversing the district court, the Seventh Circuit distinguished a non-spousal inherited IRA as “a time-limited tax-deferral vehicle, but not a place to hold wealth for use after the new owner's retirement.”[5] Specifically, the Seventh Circuit noted that under the Internal Revenue Code, a non-spousal inherited IRA is subject to mandatory distribution that must begin within a year of the original owner’s death and be completed in no less than five years.[6] Furthermore, no new contributions may be made to the account.[7] Consequently, the Seventh Circuit opined that the non-spousal inherited IRA was not a “retirement fund” under the Bankruptcy Code in the hands of the debtor, and as a result, the court held that the non-spousal inherited IRA was not exempt.[8] In reaching such a holding, the Court declared that “to treat this account as exempt under [section]522(b)(3)(C) and (d)(12) [of the Bankruptcy Code] would allow the debtor to shelter from creditors a pot of money that can be freely used for current consumption.”[9]

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Expanding Bankruptcy Rights of Social Security Recipients

By: Sarah Roe

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in Ranta v. Gorman (In re Ranta), the United States Court of Appeals for the Fourth Circuit held “that the plain language of the Bankruptcy Code excludes Social Security income from the calculation of ‘disposable income,’ but that such income nevertheless must be considered in the evaluation of a [chapter 13] plan’s feasibility.”[1] In Ranta, the chapter 13 trustee objected to the debtor’s proposed plan, arguing that the debtor failed to properly calculate his “projected disposable income” under section 1325(b)(1)(B) of the Bankruptcy Code because he inflated his expenses, improperly reducing his disposable income.[2] While the debtor acknowledged that his expenses were overstated, he argued that his plan nevertheless complied with section 1325(b)(1)(B) since his Social Security income was excluded from his “disposable income,” and therefore, he argued that his disposable income was negative even after adjusting his expenses downward because his expenses still exceeded his non-Social Security income.[3] As such, the debtor argued that he was not required to make any payments to his unsecured creditors under section 1325(b)(1)(B).[4] The bankruptcy court ruled in favor of the chapter 13 trustee, holding that the debtor’s plan was not feasible. The bankruptcy court reasoned that if the debtor’s Social Security income was not included in the projected disposable income calculation, then the court could not consider those funds when determining whether the plan was feasibile.[5] The district court affirmed.[6] The Fourth Circuit, however, reversed, holding that although the Social Security income was excluded from the “projected disposable income” calculation, if the chapter 13 debtor proposed to use Social Security income to finance a plan, the bankruptcy court must consider the debtor’s Social Security income when examining a plan’s feasibility.[7]