Monthly Archives: December 2015

Abandonment of Property

Alberts Law, , , ,

At the start of a bankruptcy filed under Chapter 7, a debtor creates a bankruptcy estate that includes all interests in property in which you, as the debtor, hold any legal title or equitable. To show why abandonment occurs, if you gave a security interest in property, such as a house with a mortgage, in exchange for a loan, you agreed to a lien on that property created by agreement. A lien is an interest in the property that gives the creditor security for payment of a debt or performance of an obligation. This can create difficulties for the bankruptcy estate’s trustee, who looks for estate property to sell to generate funds to pay creditors some amount of money for what you owe them since the security interest must be paid first, leaving a smaller pot left to divided among other creditors.

The security interest also makes the use of exemptions more likely to succeed in protecting property from being lost during a bankruptcy – if the value of the lien and the amount of any exemptions cover your property’s total value, then a trustee could not generate funds for other creditors by selling the property since the secured creditor must be paid while you are entitled to receive the amount of your exemption. However, if you have a considerable amount of property that you want to keep but lack exemptions to cover all of it, you would need to consider Chapter 13 of the Bankruptcy Code, as Chapter 7 would leave at least some of the property unprotected. Meanwhile, in Chapter 13, plan confirmation regarding debt payments vests property interests in the debtor so the trustee doesn’t have to deal with the issue of abandonment.

Any nonexempt property creates an issue for a Chapter 7 trustee, though. It often will be “abandoned” or may be sold back to the debtor. These options arise because the trustee would have to liquidate the property – this involves converting it into cash and paying creditors of the estate. However, the costs of liquidation would include any liens and taxes that exist as well as costs of handling the sale. Often, this leaves little for distribution. This is why abandonment commonly occurs. The trustee decides how much of a burden the asset is when the estate is being administered or deciding that the asset is of inconsequential value and benefit to the estate. The value and benefit to the estate usually are the deciding factors. If the effort and obligations involved in getting rid of an asset outweigh the benefit that the estate would receive, the trustee has no reason to do anything with it. As a result, abandonment of this property occurs, which often puts the asset back in the debtor’s possession.

 Abandonment may happen during or after the administration of the bankruptcy estate, at some point following the meeting of the creditors when the nonexempt assets are turned over to the trustee’s control. Commonly, the debtor schedules the property when filing for bankruptcy, but it is not administered by the trustee through the closing of the estate. The presumption of abandonment will arise and, if no court order states otherwise, the property remains with the debtor by operation of law. Also, a trustee may pursue abandonment prior to the closing of a case after deciding that the property is too burdensome to administer or, more commonly, determining its value is inconsequential and retention does not benefit the bankruptcy estate, as mentioned earlier. This type of abandonment generally requires notice from the trustee to parties that might have an interest in the property followed by a court hearing if a party objects to abandonment.

 

A party in interest regarding specific property also could file a motion requesting abandonment. The Court would have to sign an order for the property to be abandoned here. While the party bringing the motion usually would be a creditor, the motion could be brought by the debtor who might think that the trustee is waiting for any nonexempt equity to increase in value before finishing the administration of the property, which often is real estate in this situation.

 The Bankruptcy Code does prevent the abandonment of property at times. Property could remain in the bankruptcy estate because it has not been administered or abandoned by the time that the case closes, which could occur when the property that doesn’t appear in the bankruptcy schedules. The trustee cannot administer or abandon unknown property. A debtor might need to reopen the case to attempt to get an order for the abandonment of the property. The cost and the time to do this is a reason for being thorough and forthcoming when you originally decide to file for bankruptcy.

While abandonment can occur at various times and in various ways under the Bankruptcy Code, its impact is what really matters. At the point that abandonment occurs, possession generally remains with the party having possession. Often, the debtor is this person when no security interest exists. However, with property that is used as collateral for a debt, the result could be different. For example, property that was repossessed and remains with the creditor at the time of abandonment may remain with the secured creditor. Often, secured property is under the debtor’s control and will remain there when it is abandoned by the trustee. Since abandonment doesn’t affect the automatic stay’s status, the secured creditor cannot take action to get property returned (for example, via lien enforcement through the legal system).

 

When the automatic stay ends, a secured party can look to non-bankruptcy laws to see what to do to get the property. With real property, this would involve following the foreclosure procedure under state law; if successful, the creditor eventually could have a sale scheduled.

 

Abandoned property and unsecured debts lead to a straightforward result since these debts are discharged and the property is not used as security for any debt – the property remains with the debtor. When secured interests are involved, the ultimate disposition of property becomes less predictable. In Chapter 7, the discharge eliminates personal liability for the amount owed so you can’t be sued for any deficiency, such as when property is sold but the proceeds are less than the debt. (You may have to worry about the IRS, though, because you had a debt obligation of which some portion never has to be repaid – this often is considered income to a person who no longer needs to worry about repayment of the entire debt. The IRS does have an exception regarding primary residences and discharge of indebtedness, though.)

Although you aren’t liable for the debt after abandonment of a secured property interest, the lien that attached to the property itself remains if you did not take care of this issue during the bankruptcy. This is why a secured creditor can take steps to sell the property after obtaining relief from the automatic stay or after the bankruptcy court issues the discharge order in your case. If there is no sale, the debt remains attached to the property. As long as a valid lien under state law exists, a secured creditor has a right to payment from the disposition of this property, although you, as the debtor, have been relieved of personal liability through the Chapter 7 bankruptcy.

 

Length of Separation in Divorce & Its Impact

Alberts Law, Topics of Interest, , , ,

In 1980, Pennsylvania’s Divorce Code underwent a monumental change. Previously, one spouse had to prove that the other spouse was at fault for the marriage’s breakdown due to such reasons as adultery or indignities (a course of conduct making a spouse’s condition intolerable and life burdensome). She or he also needed to be the “injured and innocent” spouse, meaning that the other spouse was the primary cause of marital discord. 1980 brought “no-fault” divorce, which could be based on the parties’ consent that the marriage was irretrievably broken or based on the length of separation due to the marriage’s irretrievable breakdown. Because the length of separation seems likely to change in the near future, this is the focus here.

In all no-fault cases, one party claims the marriage is irretrievably broken – marital difficulties have caused an estrangement leaving no reasonable likelihood of the parties getting back together. When one spouse won’t consent to a divorce, the no-fault ground focuses on living “separate and apart” for a certain length of time. A separation is a fact-based determination. There is a presumption that the parties separated on the date the divorce complaint was served, but a spouse can choose a different date if the facts support it. Separation doesn’t require living in different residences – living separate lives is what matters. The end of sexual relations and financial independence are factors that help to prove separation. Communicating the intent to separate also is an important fact.

A not-too-uncommon question is how sex between separated spouses affects a period of separation. Involvement one time shouldn’t end the original separation. However, occasional intercourse could be an important fact causing a judge to decide the separation has ceased. An attempt to reconcile for a month or two could end a separation, too. If the spouses break up yet again, the separation starts all over again.

The ability to obtain a divorce due to the length of separation has important implications. Before no-fault divorce in Pennsylvania, only the “injured and innocent spouse” could obtain a divorce. No-fault grounds mean that even a spouse whose behavior causes the marriage to fall apart can obtain the divorce. Additionally, if a no-fault ground exists for granting the divorce, then a fault-based divorce cannot be obtained. The length of separation required can come into play here. If one spouse won’t consent and the parties haven’t been separated long enough for a non-consensual no-fault divorce, then the spouse who files might seek a divorce based on fault under these circumstances. However, when the required separation period becomes shorter, fewer spouses will have to choose to pursue a fault ground here – if the length of separation is reduced to one year in Pennsylvania, the difficulty of pursuing a divorce on a fault ground would make it less attractive and necessary as the path to obtaining a divorce.

A divorce based on the length of separation affects property and related issues, too. Although the following does not directly deal with the issue of length, spouses who begin living separate and apart have a date of separation. This matters because property acquired after this date is presumed to be non-marital and does not automatically become subject to equitable distribution. (An important point about presumptions in law is that they are not rules without exceptions; instead, when someone gets the benefit of a presumption, the other party can rebut it with evidence overcoming the presumption.) A longer period of separation generally will mean the parties will claim more property as being acquired after the separation and, therefore, not subject to equitable distribution.

A divorce case often involves issues beyond the divorce itself, including property distribution, custody, and support. At one time, divorces in Allegheny County generally would be subject to automatic bifurcation, which meant that the divorce was granted before the remaining claims were resolved. In 2005, the Divorce Code was revamped so that bifurcation became the exception. For the exception to apply in a divorce based on the length of separation, a party has to establish specific grounds for the divorce as well as compelling circumstances favoring bifurcation for the marriage to end before economic claims are decided. The court wants to see that the dependent spouse, in particular, receives economic protection during a bifurcated divorce.

While different counties may be more likely to allow bifurcation, it should be remembered that the statute doesn’t favor bifurcation. Therefore, a party in a divorce based on length of separation could have to wait for the required separation period to pass and then wait even longer for other claims to be decided before receiving a divorce decree. If the period of living separate and apart becomes one year, this should result in a shorter period overall for a decree in divorce even without bifurcation.

A final note about changes in the length of separation: the last change occurred in 1988 and affected any separation that began after February 12th of that year. If you separated on February 13th or later, you had to wait two years while a separation that began on February 12th still was subject to a three-year separation. Whether this approach would be used again isn’t known yet. However, it is something to think about if you’re considering a possible separation and divorce right now.