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Bankruptcy Appellate Panel Affirms Order Turning Over Debt Collector Funds to Estate - In re Hernandez

January 4, 2013

Vincent Howard and our Rubidoux personal bankruptcy lawyers have represented many people over the years who have gotten tangled up with debt collectors. Debt collection is an ugly business, with some of the worst members of the industry using fraud, harassment and threats to collect despite laws forbidding it. Debt collection is forbidden after a bankruptcy petition is filed, but if a bankruptcy is filed directly after the debt is collected, the bankruptcy court can use its discretion about whether to collect. In In re Hernandez, the Bankruptcy Appellate Panel of the Ninth U.S. Circuit Court of Appeals affirmed that the law firm for a collection agency must turn the contents of Jose J. Hernandez's bank account over to the bankruptcy estate.

First Select, Inc. obtained a judgment against Hernandez in 2002. In 2008, First Select recorded and later renewed the judgment, for a total of $3,723,19. In 2011, a successor to First Select, Collect Access, submitted a writ of execution to the Los Angeles County Sheriff's Department, and the department served Hernandez's bank and obtained the $712.39 that was in his bank account. Twenty days later, Hernandez filed for Chapter 7 bankruptcy, claiming those funds as exempt under California's "wild card" exemption. The trustee filed a report of no distribution, and thereafter, Hernandez successfully moved for turnover of the funds, which were with Collect Access's law firm. CA opposed, arguing that Hernandez no longer owned the funds when he filed for bankruptcy and did not timely file. The bankruptcy court ultimately granted the turnover motion and Hernandez's actual costs and fees, as well as punitive damages for failure to comply.

After concluding that the appeal is not moot, the BAP found that the turnover order was not made in error. It held that the pre-petition levied funds held by the Sheriff's Department are property of the bankruptcy estate, but disagreed withthe bankruptcy court's finding that such funds are under a lien until they are turned over to the creditor. California law clearly states that the lien ends when turned over to the Sheriff's Department, the BAP said. However, these particular funds appear from the record to be solely Social Security benefits, the court said. And under California law, Social Security benefits are exempt from collection. Thus, it said, Hernandez got the right result for the wrong reasons. Procedural irregularities in his case did not hurt CA's rights, the panel said, and upheld the bankruptcy court.

Vincent Howard and our Santa Ana individual bankruptcy attorneys are pleased to see a victory for this debtor. The opinion notes that Hernandez subsists on less than $700 a month in Social Security benefits, which in Los Angeles County makes him far from rich. Thus, confiscating the money in his bank account likely meant confiscating everything he had to live on, which is exactly the situation that the rule forbidding turnover of Social Security funds is meant to avoid. While debt collectors are certainly legally entitled to enforce their rights to a debt, our society has determined that this should take second priority behind the ability of seniors and disabled people to support themselves. Vincent Howard and our Claremont consumer bankruptcy lawyers aggressively defend Social Security and other benefits that should be exempted from collections and bankrutpcy.

Based in Orange County, Howard Law, P.C., represents clients across California who are considering bankruptcy as a way to get out of serious debt. To tell us your story and talk more about our services, call us today at 1-800-872-5925 or send us a message through our website.

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