Source: https://blog.nolo.com/bankruptcy/tag/chapter-7/
Timestamp: 2019-04-26 04:30:56+00:00

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Law v. Siegel: Did the U.S. Supreme Court Let a Conniving Bankruptcy Debtor Off the Hook?
In a recent case, Law v. Siegel, the U.S. Supreme Court said that a bankruptcy trustee cannot “surcharge” (redirect funds from) a bankruptcy debtor’s exempt property to pay for the trustee’s attorney’s fees — even if the debtor defrauded the court. The decision was a blow to bankruptcy trustees. But it certainly doesn’t mean that debtors who lie and cheat will get off without penalty.
In 2004 Mr. Law filed for Chapter 7 bankruptcy in California. His home was worth $363,348 and he claimed the full $75,000 of California’s homestead exemption. He also listed two liens against his home that, taken together, exceeded the value of his home. Because these three liens meant that he had no equity in his home, there was nothing left for creditors and he proposed to keep his home in the bankruptcy.
The bankruptcy trustee, Mr. Siegel, questioned the existence of one of the junior liens – that of Lin’s Mortgage and Associates. Long story short: After five years of litigation, the bankruptcy court ruled that the Lin’s Mortgage loan was fictitious. Law had made it up just so he could keep his home. The bankruptcy court ruled that Mr. Law defrauded his creditors and the court.
At this point, Mr. Siegel was in the hole for attorney’s fees to the tune of a whopping $500,000. Bankruptcy law allowed Mr. Siegel to take his fees out of the proceeds of the home sale, after paying off Mr. Law’s first mortgage. But that amount didn’t make a dent in Mr. Siegel’s fees. So, Mr. Siegel asked the court to “surcharge” Mr. Law’s $75,000 homestead exemption. Essentially, he asked the court deny the exemption, and allow Mr. Siegel to use the $75,000 to defray his attorney’s fees.
Needless to say, Mr. Law was not a sympathetic character and the bankruptcy court did not have a problem giving the $75,000 to Mr. Siegel. When Mr. Siegel appealed to the Bankruptcy Appellate Panel of the Ninth Circuit, those judges agreed with the bankruptcy court. He then appealed to the Ninth Circuit, which also agreed with the bankruptcy court.
Although the bankruptcy court’s ruling seems like a no-brainer, there has been a split between the circuit courts over surcharging – and for good reason. The federal bankruptcy law (§522) which allowed Mr. Law to exempt $75,000 in his home specifically states that the exempted amount “is not liable for” administrative expenses, including attorney’s fees. And that’s exactly what Mr. Siegel proposed – to use the $75,000 to pay his attorney’s fees.
the bankruptcy court has “inherent power” to sanction litigation practices.
The bankruptcy bar awaited the result with baited breath. On the one hand was the group of lawyers who serve as bankruptcy trustees. They were hoping the U.S. Supreme Court would allow the surcharge.
In the end, the Supreme Court held its nose and ruled for Mr. Law.
Its reasoning was fairly simple: A bankruptcy court cannot take an action that is specifically prohibited by another section of the bankruptcy code.
What Does This Mean for Bankruptcy Trustees?
The decision is not a good one for bankruptcy trustees. Mr. Siegel labored for five years to prove that Mr. Law had defrauded the court and his creditors. And now he can’t even touch the $75,000 exemption. Yes, there are consequences for Mr. Law (see below), but they don’t necessarily help Mr. Siegel recover his attorney’s fees.
This decision certainly doesn’t give free reign to debtors to play fast and loose with the bankruptcy code, or worse, to defraud the court.
The U.S. Supreme Court was very careful to point out the many sanctions that are available to deal with debtors like Mr. Law.
The bankruptcy court can impose sanctions on a debtor for bad faith litigation tactics. It won’t take much to put Mr. Law in this category.
A debtor who commits fraud can be subject to criminal prosecution, and possibly go to jail for up to five years.
Can I Get Rid of HOA Dues in Chapter 7 Bankruptcy?
I would like to file for Chapter 7 bankruptcy to get rid of credit card debt and past due home owners association (HOA) dues. I currently live in my home. Can I discharge past due HOA dues in chapter 7 bankruptcy?
The subject of past due HOA dues is tricky for many lawyers and bankruptcy clients, because there is so much misinformation about it.
Here is what you need to know about HOA dues and filing Chapter 7 bankruptcy. As you will see, it makes a big difference whether or not you are keeping the property.
If you are going to keep the property, you will have to pay the past due HOA dues. This requirement is no different than paying any past due mortgage payments as a condition of keeping your property. You must also pay all of the future dues and assessments for as long as you own the property.
Your HOA articles are a “covenant running with the land,” which means that it is sort of like a zoning regulation. Everybody in your home owner’s association has to obey the rules. For example, if you buy a piece of property that is zoned only for single family residences, you will be violating the zoning ordinance if you suddenly turn your house into a gas station.
In your case, you bought your home subject to the requirement that you would abide by the terms and conditions contained in the HOA articles. This includes paying all dues and special assessments.
However, the bankruptcy law specifically provides that HOA dues that accrue after you file for bankruptcy will not be discharged. So, if you continue to own the property after your bankruptcy filing, you will still be liable for ongoing HOA dues. If you don’t pay the dues, the homeowner’s association can collect by: suing you for the money or even foreclosing on your property.
I recently filed for Chapter 7 bankruptcy and have a hearing date set. I work for the State of California and have a §457 Retirement Plan. I want to borrow money from the plan to pay for a divorce attorney. Will borrowing from my §457 plan affect my bankruptcy? According to the plan, this would be a refinance since I borrowed money from it last year.
I am sorry that you have to deal with a bankruptcy and a divorce all in the same year. On the other hand, maybe it’s best to get both of these over with at the same time, so you can start out next year with a new beginning.
Here is the answer to your question. If your §457 plan is willing to let you take this loan, I believe that you can go ahead and do so. If you are represented by a lawyer in your bankruptcy case, I recommend that you show this to your own lawyer for an opinion before acting on this.
Here is the reasoning behind my answer.
Your California State Employee’s IRS Code §457 Retirement Plan is not property of your bankruptcy estate. Even if it was, it would qualify for an exemption. (To learn how exemptions help you protect property in Chapter 7 bankruptcy, see Nolo’s area on Bankruptcy Exemptions.) Since the money in your Plan is protected, if your Plan administration will allow you to take the loan, you can do so.
The money that you earn after the date you filed your Chapter 7 case is likewise not property of the bankruptcy estate. Therefore you are entitled to spend your current earnings to make the required loan payments.

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