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In many bankruptcy actions, the court will appoint officers to oversee certain aspects of the case. Any officer appointed by a court must remain neutral, and if a conflict is revealed, the officer usually must recuse his or her self from the case. When a party in a bankruptcy proceeding believes that a bankruptcy officer unjustly affected the outcome of the case due to a conflict, the party may be able to seek damages from the officer via a civil lawsuit. There are requirements the party must comply with, however, and if the party fails to file the lawsuit properly, his or her claims may be dismissed, as demonstrated in a recent case arising out of California. If you live in California and are in need of assistance with a bankruptcy matter, it is prudent to consult a skillful California bankruptcy attorney to discuss your case.

Factual and Procedural Background of the Case

It is reported that a debtor filed for bankruptcy, seeking in part to discharge a judgment from a defamation lawsuit. Creditors subsequently filed an adversary complaint, arguing that the debt was not dischargeable due to the debtor’s willful and malicious acts. Subsequently, the court-appointed a special discovery master to assist with the proceeding. After several months had passed, the creditor informed the master of a conflict of interest, namely that the master’s firm previously represented another party in a case against the creditor. The master recused herself but refused to refund the fees paid by the creditor. The creditor then filed a motion for a declaration that leave was not required to file a lawsuit against the master in State court, or alternatively, seeking leave to sue the master. The court denied the motion, and the creditor appealed.

Filing a Lawsuit Against an Officer Appointed by the Bankruptcy Court

Pursuant to the Barton doctrine, a plaintiff who wishes to institute a lawsuit against a bankruptcy officer in another forum, for actions taken by the officer in his or her official capacity, must first obtain the authorization of the bankruptcy court. The main criterion of an inquiry under the Barton doctrine is whether the suit the party seeks to file challenges the acts taken by an officer were within his or her authority as an officer of the court and were undertaken in his or her official capacity. The doctrine arose out of the fact that bankruptcy law requires that all matters that affect the administration of a bankruptcy estate must either be filed in bankruptcy court or with leave from the bankruptcy court. Continue reading

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The Federal Appellate Panel for the 8th Circuit Court of Appeal recently held if a Debtor makes payments toward home improvements in an attempt to defraud a creditor, that those payments may not be exempt.  The issue for decision in this case was whether a debtor can claim home improvement payments as being exempt from the bankruptcy estate in a Chapter 7 bankruptcy case?

The facts in this case were actually quite typical and could apply to a number of people. The Debtors (Wife and Husband) made improvements to their principal residence over a period of time before filing for Chapter 7 Bankruptcy. During that time their daughter opened a bank account whereby Debtors began to make large deposits amounting to approximately $60,000.00 into their daughter’s bank account who then made payments toward the home improvements as well – in addition to other family members.

Debtor’s eventually filed for protection under Chapter 7 of the bankruptcy code after having engaged in this course of conduct for some time. In their Petition they attempted to take advantage of the homestead exemption by claiming that they had roughly $60,000.00 of equity in their home. The “homestead exemption” prevents the court from seizing and distributing that property to any creditors or the Court which may exist as equity in a personal residence. Using Title 11 of United States Code section 522(o) the Bankruptcy Trustee objected to the debtors’ exemption claiming that the improvements did not qualify under the homestead exemption since the money had come through their daughter’s account and was being claimed by the debtors as exempt to delay, hinder, and/or defraud their creditors.

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Sacramento Bankruptcy NewsflashAccording to the Eastern District of California that handles all Chapter 7 and Chapter 13 Bankruptcy cases in the Sacramento Metropolitan Area, data shows that filings in the region have fallen consistently over the last few years. As we all have probably noticed, the economy has improved significantly since the Great Recession of 2009. The bankruptcy filing statistics are proof that the economy is now stronger than it has been over the last several years. Sacramento saw a record number of filings in 2010 with a whopping 54,365 cases filed that year. Every year subsequent saw fewer cases filed than the previous year. Last year the Eastern district of California saw only 14,328 new cases filed and includes all Chapter 7, Chapter 13, and Chapter 11 bankruptcies. These numbers even predate filings before the Bankruptcy Laws were modified significantly in 2005 under the Bankruptcy Abuse and Consumer Protection Act (BAPCA).

Although the economy has improved substantially and the unemployment rate has dropped from 9% to less than 5% since 2010, there are still a significant number of people who need to consider taking advantage of the bankruptcy laws in order to confront and resolve the economic turbulence they face. Historically, the number one reason people needed to file for bankruptcy were unexpected medical bills. The recent filings during the height of the Great Recession were due to the mortgage and foreclosure situation many people faced with their homes. Fortunately, many people have already made great use of the bankruptcy code to shield themselves from the banks and to reorganize debts into a much more manageable situation and to stop the foreclosure process in its tracks.

The best use of the Bankruptcy laws are to get your debts discharged that enable a person to start over with a “clean slate” financially. The ultimate discharge of all debt is granted by a federal bankruptcy court that issues a stay to prevent a creditor from any further attempt to collect a debt from the individual. While most debts such as credit cards, medical bills, and other unsecured debts can be extinguished in bankruptcy, other types of debts cannot be discharged: these include child and spousal support, tax debts, and sadly most types of student loans.

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Many people going through bankruptcy or divorce in the Sacramento area find that these two distinct legal fields can actually run hand in hand. Often times, financial problems can lead to the breakdown of a marriage, or conversely, the breakdown of a marriage and division of assets can lead to a need for filing Chapter 7 or Chapter 13.

Ideally, if Chapter 7 or Chapter 13 rests in a couple’s best financial interests it makes sense for the couple to file a joint bankruptcy petition. This, however, requires: (1) that the parties are able to continue to work together and cooperate in the bankruptcy; and (2) they have not received a judgment of dissolution restoring them to their status as single persons.

Since many couples going through divorce proceedings cannot work together the bankruptcy process can become very complicated. A recent case filed out of New Jersey typifies the problems created when a divorcing couple decides to file bankruptcy separately but before they have actually received their judgment of dissolution of marriage.

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Many people considering filing Chapter 7 or Chapter 13 bankruptcy in the Sacramento metropolitan area are interested to know the statistics associated with filing for protection from their creditors and elimination of their debts. These people are relieved when they find that most individual bankruptcy cases are not caused by reckless spending. The number one reason that causes a person to file bankruptcy is financial hardship.

As we have seen over the last few years, peaks in bankruptcy petitioner typically occur during times of economic downturn. Interestingly, states with the least consumer friendly laws ordinarily receive the most bankruptcy petition filings. This is because those laws make it easier for creditors to collect unpaid debts from the individual. The United States saw the highest number of bankruptcy filings in 2005 (likely due to a change in the law making it more difficult to file bankruptcy). That year the Courts processed over 2 million bankruptcy cases. Since reform of the bankruptcy laws in 2005 the statistics have gone up and down. Over the last 5 years the Courts have seen the highest number of filings in 2010, with over 1.5 million cases filed. Last year, the federal bankruptcy courts saw less than 950,000 cases filed.

California has typically seen the highest number of bankruptcy cases filed throughout the nation. This is in large part due to our high population. Conversely, Alaska typically sees the fewest number of bankruptcy filings. For example, Alaska residents accounted for less than 1,000 bankruptcy filings in 2011 whereas California saw more than 240,000.

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As a Sacramento Bankruptcy Attorney, my potential clients are often concerned with the ramifications of filing a Chapter 7 or Chapter 13 bankruptcy Petition. It is my job to help people understand and explain some of the myths that surround this process. Some potential filers may be concerned with the effect bankruptcy may have on any security clearance as a condition of his or her employment. My short answer is: Bankruptcy will have little impact on a security clearance.

The major reason that the Bankruptcy has no negative impact on a security clearance is because it makes a person less of a security risk. The United States Department of Defense states: “The purpose of a security clearance is to determine whether a person is willing and able to safeguard classified national security information, based on his or her loyalty, character, trustworthiness, and reliability.” The fact of the matter is that when a person files for Chapter 7 or Chapter 13 for a legitimate reason, it shows that this individual is making a responsible choice and confronting whatever economic situations are troubling them.

“All available, reliable information about a person, past and present, favorable and unfavorable, is considered in reaching a clearance determination. When an individual’s life history shows evidence of unreliability or untrustworthiness, questions arise whether the individual can be relied on and trusted to exercise the responsibility necessary for working in a secure environment where protection of classified information is paramount.

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Sacramento area residents considering a Chapter 7 or Chapter 13 Bankruptcy should be aware the Eastern District of California has decided to raise the costs of filing a case effective June 01, 2014. The new Chapter 7 filing fee for the Sacramento jurisdiction is now $335.00. The Chapter 13 filing fee has also been raised to $310.00.

The Judicial Conference of the Administrative Office of the United States Courts approved the increase earlier this year. This fee increase reinforces the Federal Court’s continuing policy of shifting costs from the general population to the people who actually use the courts. In the context of a bankruptcy, this shift can be problematic, however, since the individuals seeking protection of the bankruptcy code have difficulty coming up with the filing fee to begin with, much less, paying the increased fees.

Every time the court Imposes a fee increase, we find less people being able to take advantage of the protection offered by the Bankruptcy Code. Supporters of the fee increase would argue that a debtor who cannot afford to pay the increased fees may apply for a fee waiver or alternatively request to make the fee in installments over the course of several months.

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Yesterday, a local Sacramento man received a 17 year sentence for committing Bankruptcy Fraud after filing for Chapter 7. Steven Zinnel was convicted last July of hiding assets during his bankruptcy in an effort to avoid paying his wife significant support during their divorce.

Zinnell and his wife terminated their relationship in 1999 and engaged in a bitter divorce. Mr. Zinnell later filed his bankruptcy petition on July 20, 2005. He hid the assets by placing them in other individual’s names. Evidently, Mr. Zinnel concealed assets and income in order to avoid having to pay his wife spousal and child support. As the divorce intensified between the parties, Zinnel asked FBI to investigate his wife. Upon conducting their investigation, FBI agents uncovered multiple bankruptcy crimes committed by Zinnel and his attorney, Derian Edison. FBI agents uncovered an elaborate money laundering scheme whereby ZInnel funneled concealed assets back to his name by using his attorney’s trust account after receiving the bankruptcy discharge.

Upon his conviction, The Federal Court imposed a $500,000 fine on Zinnel and sentenced him to almost 18 years in federal prison. He was also ordered to hand over almost $3 Million in corporate assets to the US government.

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Sacramento area residents who feel ashamed with the idea of filing for Chapter 7 or Chapter 13 bankruptcy need to understand that there should be no personal guilt or shame associated with this decision. The determination to file bankruptcy is an economic decision, period. There is no moral association attached to the concept of bankruptcy. In fact, bankruptcy principles have been in existence since the middle ages and are even included in the United States Constitution!

Sadly, creditors have worked very hard at shifting an economic question into a moral question in an effort to dissuade people from making this decision. They have attempted to embarrass or make those who find themselves in economic peril to feel guilty for having to file. What people fail to remember, however, is that creditors are voluntarily taking risks by extending credit. Having a debt discharged is part of the risk associated with doing business in the lending arena.

Lenders are sophisticated and completely aware that some of their customers will file for bankruptcy; in fact, it’s a part of their business model. This recognition should enable a person considering bankruptcy to focus on the economics of the decision rather than the morality that has been improperly associated with it.

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People residing in the Sacramento metropolitan area must make many decisions when deciding to file Chapter 7 or Chapter 13 bankruptcy. I am often contacted by individuals who have already made his or her filing but now needs an attorney to review the case in order to correct the mistakes that have been made in the case. I will offer some suggestions to take into consideration for those who have considered filing for bankruptcy.

Using a bankruptcy “mill.”

In an effort to increase volume and reduce fees many local bankruptcy firms have established a “mill” approach to serve the demand the market has seen over the last few years. Because bankruptcy law involves significant paperwork firms are able to batch cases together and file them concurrently. While convenient for the attorney, this process does not serve the client well. These firms become overly burdened and often lose sight over the individual needs of their customers. The clients are batched in with other clients who are in a similar financial position and led through the process as if they were cattle. This mass production approach to bankruptcy reduces the potential benefits of the bankruptcy code for the individual client.

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