Archive for the ‘ Pre-Bankruptcy Planning ’ Category

Where can you file a bankruptcy case?

I had a client who lived in Europe – Luxembourg, of all places.  He went there because his business ventures in the US were going bad, so he took time away from this country.  His wife was a national of Luxembourg, so he moved his whole family to a house in the shadow of his inlaws.

But one creditor in the US didn’t like this.  The creditor sought a judgment and managed to get the Luxembourgish authorities to garnish the debtor’s wages for a prospective US judgment.  So the debtor contacted me and asked me to file a bankruptcy petition in the US.

There is a statute (28 USC 1408, if you’re interested) that tells us what bankruptcy courts have jurisdiction over a case.  The debtor may file in any judicial district in the U.S. in which he has had his residence, his domicile, his principal place of business in the U.S., or his principal assets in the U.S., for the greater part of the 180 days preceding the case filing.

My debtor had moved into his mother’s house in Simi Valley prior to moving to Luxembourg two years earlier.  He intended to move back to his mother’s house when his children finish high school in another five years.  He had two failed businesses in Canoga Park, both of which were now-inactive corporations.

The debtor didn’t have residence.  The trustee and I fought over whether he had domicile: that tricky concept requires physical presence in a spot in which you have the intent to live permanently; having created domicile, you can move around, so long as you don’t change your mind about where you want to end up.  The trustee said it wasn’t clear that my client intended to come back to California.

We also argued over whether his principal assets were in California.  He owned an overencumbered house in Luxembourg, but had a bank account with $600 and stock in a corporation owning a breakfast café in Woodland Hills (he was essentially a silent partner in that one, and it had no value).  The statute refers to “principal assets in the United States;” I argued that since he had no assets anywhere else in the U.S., his Luxembourg assets were irrelevant, and the court in the Central District of California had jurisdiction.

But the trustee finally agreed that the debtor had a principal place of business in the Central District.  He had opened and closed businesses here; he was a wage slave in Luxembourg, thus that wasn’t a “principal place of business.”  So the trustee agreed to no longer challenge jurisdiction, and my client in Luxembourg could file his bankruptcy case in Woodland Hills.

The trustee’s concession created new problems, because now the debtor had to show up at a meeting of creditors.  Sometimes the trustee will allow an out-of-country debtor to submit to the meeting of creditors by telephone or by written interrogatories; here, the trustee insisted that the debtor be present in the U.S. for the meeting of creditors. She would have been okay with the debtor landing in New York and sitting at a U.S. Trustee’s office and answering questions by phone; my debtors decided that since they needed to fly to the U.S. anyway, why not just go all the way to California?

Can I keep my car in bankruptcy?

California and federal law allows a person to bring some assets through bankruptcy, by allowing exemptions. We the people want citizens to be able to make a fresh start without needing to go begging on the streets; but if we are going to stiff creditors, we don’t want the debtors to gorge on expensive assets while shedding debt. You get to keep your 10-year-old beat-up Toyota; you don’t get to keep the brand-new Lexus that your sugar daddy gave you. How do the courts enforce this difference?
California has two exemption schemes. Under Type 1, at California Civil Code Section 704, a debtor may exempt a motor vehicle to the extent of $2,725. This means that, once the debtor files bankruptcy, the trustee may sell the debtor’s car, but only if the trustee will realize some dividend for the creditors after paying the exemption amount of $2,725 to the debtor. If the trustee can’t do this, or convince the judge she can do it, the debtor keeps the car.
If the car is used as a “tool of the trade,” for instance, because it belongs to a realtor who uses it only to ferry clients to house showings, the exemption increases to $4,850. If both spouses have business cars, the exemption is $9,700.
If the debtor chooses this Type 1 exemption scheme, he’s stuck with the entire scheme. The main advantage to Type 1 exemptions is that a married couple may claim a $100,000 exemption in their homestead. The main disadvantage is that there is no “wild card” exemption.
Type 2 exemptions allow a debtor to exempt $3,525 in any single car. In addition, the debtor may exempt up to $2,200 in tools of the trade. So the realtor’s car could conceivably have an exemption of $5,725.
Type 2 exemptions also allow a debtor to exempt up to $24,425 in any kind of property, the “wild card” exemption. Using this exemption, the debtor could protect almost $30,000 of value in a car, if he wanted to keep nothing else.