Need Help For a Business Law Test

[threekgtman]

Im not trying to cheat the system and get out of doing my research. I am just stuck and have read the chapters in my book several times but Im still stuck. So I was hoping some of you could help.

The scenario is a couple (with 2 minors) is filing for bankruptcy. Their house is appraised at 160k but they owe 115k (to bank 1) on it. They also took out a home equity loan of 20k (bank 2) to pay for school loans. I am the trustee, how do I divide the assets etc.

Federal exemptions say the couple (with 2 dependents) is able to keep 18,450 each (or $18,450x4= $73800) in real property.

So does this mean I, as the trustee, sell the house at the appraisal of 160k and subtract the 73,800 of exemptions and then I pay bank 1 and bank 2?

Thanks for all your help!!!

[keepmine]

Keep hitting the books. You're confusing homestead exemption with real propertry {personal property} and the exemption amount applies to the parents-not the children. $18Kx2. You pay the lein holders first and then the debtors get their exempted amount. Unsecured creditors get any leftovers.

[HHM]

Unfortunately, the real answer may not be the "test" answer.

The home is encumbered to $135,000 and the appraised value is $160,000. Thus, net equity is $25,000. The current Federal Homestead exemption is $20,200 (but if your test uses the previous amount, go with that test). The federal exemption only stacks once, i.e. if its a "joint BK" (husband and wife), the total exemption is $40,400. The kids don't count for the exemption.

Based on the facts as you stated, there would be nothing for the trustee to do because the home is fully exempt (even under the old amount). There is no non-exempt equity so the trustee is unable to liquidate the house.

However, let me point you in a possible direction because I think this question wants you to explore deeper (and arguably more archaic aspects of BK).
In order for the trustee to do anything with the house, he has to avoid or otherwise remove the lien of the HELOC. You will want to explore sections 545-550 of the BK code. An important fact would be, when was the HELOC taken out?

There is a possible preference issue because they used the proceeds to pay student loans, thus, the trustee may be able to go after the Student loan provider for the money.
Fraudulent Transfer, the couple purposefully encumbered the house to avoid creditors. I think the trick on this question is to figure out how the trustee could undue the HELOC.

Once the HELOC is undone, the Home would have net equity of $45,000 (based on the old exemption it might be worth it). Thus, under the $18,450 exemption (x2 for married filing joint), the home would have "non exempt equity of $8,100. Thus, if the trustee sold the home at $160K, the proceeds would divided as follows
$115 to bank 1
$36.9K to debtors
$8,100 to creditors in BK.

In any event, those are some issues to explore.

In reality, would the trustee bother? Probably not. At least in this real estate climate, the true liquidataion value of the home would be below fair market value and after factoring costs of sale, the net amount going to unsecured creditors would not be worth the cost.

[threekgtman]

Thank you for both for your answers. That alone has connected a lot of the dots.

HMH, according to sections 545-550, to remove the HELOC I have to prove the debtor was insolvent, in financial instability, renting etc. My test does not include any of that information. But I do believe you are right that I have to remove the lien first because in class my professor/lawyer said people usually keep their homes and the test says the couple would like to keep their home. The HELOC was taken out in 2005 while the couple filed BK in 2009. Would it be safe to say the HELOC lien impairs their exemptions? If so the book says these liens can be removed but they have to be judicial liens or nonposessionary. Im not sure what this means.

So I am not sure, and will continue to research. Thanks again for your help and any additional information will be appreciated!

I apologize but I have one other question. (Dont worry Im not going to ask the whole test =)) Our book talks about the law, but nothing when it comes to joint filings.

The same couple has a car appraised at 4,000. She becomes involved in a wreck and had 2,000 worth of repairs (that are now done). I know that the car now has a mechanics lien on it and needs to be paid first. However shes allowed 2,950 in federal exemptions for a car. Do these exemptions get applied to the lien so she would only be liable for 4,000-2,950 = 1050? If thats true can the husbands exemption be applied here? So it'd really be 2,950x2 = 5,900?

[HHM]

Is this "law school", undergrad business law, para legal training....exactly what level of eduction are we talking about.

Also, is the car issue part of the question about the house...it sounds like the professor has given you one large fact pattern to analyze. If so, it can be difficult to respond to individual issues since in BK asset issues are inter-related.

Bottom line a BK includes 4 things
Assets
Liabilities
Income
Expenses

Assets: value; exempt or non-exempt
Liabilities: secured, unsecured, priority, dischargeable, or non-dischargeable.
Income: how much, too high or too low
Expenses: how much and for what, reasonable or unreasonable.

In any event, you are on the right track for the car as far as the lien encumbering exemption issue.
If lien avoidance and preferences are new concepts to you based on this post, then it sounds like your professor may be asking for an overall picture. The answer on the house may simply be that the house has no non-exempt equity.

[threekgtman]

Im in a Masters in Accounting program but need to take this law course. I followed everything he said in class, I just feel he didnt go this in depth and with all these compounded circumstances. He himself is a lawyer and not a professor (very nice guy).

Thanks again for your answer. He said not to think too hard about these so Im wondering if I give the overall answer like you said I'll be ok, but maybe he wants to see if we did our homework and expand on the circumstances.

Yes, we are given a large fact pattern and the same couple has this car and house.

But I really appreciate your help, thank you.

[PoorGrammyinBK7]

Duplicate - sorry

[PoorGrammyinBK7]

Unfortunately, the real answer may not be the "test" answer.

The home is encumbered to $135,000 and the appraised value is $160,000. Thus, net equity is $25,000. The current Federal Homestead exemption is $20,200 (but if your test uses the previous amount, go with that test). The federal exemption only stacks once, i.e. if its a "joint BK" (husband and wife), the total exemption is $40,400. The kids don't count for the exemption.

Based on the facts as you stated, there would be nothing for the trustee to do because the home is fully exempt (even under the old amount). There is no non-exempt equity so the trustee is unable to liquidate the house.

However, let me point you in a possible direction because I think this question wants you to explore deeper (and arguably more archaic aspects of BK).
In order for the trustee to do anything with the house, he has to avoid or otherwise remove the lien of the HELOC. You will want to explore sections 545-550 of the BK code. An important fact would be, when was the HELOC taken out?

There is a possible preference issue because they used the proceeds to pay student loans, thus, the trustee may be able to go after the Student loan provider for the money.
Fraudulent Transfer, the couple purposefully encumbered the house to avoid creditors. I think the trick on this question is to figure out how the trustee could undue the HELOC.

Once the HELOC is undone, the Home would have net equity of $45,000 (based on the old exemption it might be worth it). Thus, under the $18,450 exemption (x2 for married filing joint), the home would have "non exempt equity of $8,100. Thus, if the trustee sold the home at $160K, the proceeds would divided as follows
$115 to bank 1
$36.9K to debtors
$8,100 to creditors in BK.

In any event, those are some issues to explore.

In reality, would the trustee bother? Probably not. At least in this real estate climate, the true liquidataion value of the home would be below fair market value and after factoring costs of sale, the net amount going to unsecured creditors would not be worth the cost.

Just wondering, HHM - doesn't the trustee also get a percentage or cut of the proceeds - and if so, at what point (before or after the 1st is paid and the debtors get their exemption amount)?

[HHM]

Trustee gets a percentage of whatever he gets for unsecured creditors. The trustee's percent would be based off the $8,100 (in this example).

I get the sense the house is a non issue in this question. If the HELOC was taken out in 2005; its well beyond any meaningful lookback period; I suppose you might be able to make an insolvency argument, but we would need to know more...their unsecured debts at the time in 2005 must exceed the value of the HELOC (after all, a HELOC is a loan against Home Equity, that home equity is an asset). You still might be able to argue preference, and have the trustee go after the student loan company, but after 4 years, that line or reasoning is pushing it.

[threekgtman]

Thanks HMH again, considering the couple wants to keep the house in this scenario, I think I will try to make that argument on the test.

[threekgtman]

Sorry I have another question HMH...

The mom of the husband gave the husband a loan (not documented) to buy a car. The mom became sick and needed a car so the husband transferred the title of the car back to his mom. The husband then took a loan out with the collateral being the car to pay bills and the mom is making payments this loan...the lien cant be good because its not his car right?

Thanks again