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Sixth Circuit BAP Rules Balance of Forgotten Asset Should Be Abandoned - In re DeGroot

December 28, 2012

Vincent Howard and our Norco personal bankruptcy attorneys were interested to read about a bankruptcy that was considerably complicated by divorce. In In re DeGroot, the Bankruptcy Appellate Panel of the Sixth Circuit took on a case in which the husband of a divorcing couple neglected to list the wife's debt to him, secured by a lien on their former marital residence, on his bankruptcy petition. As a result, Joel DeGroot's Chapter 7 trustee reopened the bankruptcy when Joy DeGroot attempted to refinance the mortgage and discovered the lien. Ultimately, the trustee agreed to subordinate the lien to that of the mortgage company in exchange for a payment from Joy of $5,000. The BAP of the Sixth U.S. Circuit Court of Appeals affirmed that result, releasing both former spouses from their obligations to each other.

When the DeGroots divorced in 2002, Joel was ordered to pay child support to Joy. In turn, Joy was awarded the house, but ordered to pay $48,000 to Joel for his share of the home equity . That debt was secured with a lien against the home. Joel filed a no-assets Chapter 7 bankruptcy in 2005, listing unpaid child support but not the lien against his former home. While it was pending, the ex-spouses negotiated a settlement to a family-court case against Joel for unpaid child support. In th settlement, Joy released Joel from further child support obligations, and Joel released the home debt. However, Joel did not obtain relief from the stay to enter into the settlement. The bankruptcy trustee was aware of the settlement negotiations, but due to a large caseload, didn't file any paperwork until well after the settlement. Joel eventually received a discharge.

However, when Joy attempted to refinance in 2010, she discovered a 2007 notice of assignment from the bankruptcy case, which prompted the trustee to reopen it and seek payments from Joy. In order to finish her refinance, Joy agreed to pay $5,000 in exchange for a subordination of the lien to the mortgage. However, she was still liable for a final payment of $33,000 in 2013, and Joel was still liable for the child support. Both Joy and the trustee made motions to collect or abandon the debts. After a hearing, the bankruptcy court concluded that the debt other than the $5,000 should be deemed abandoned, and ordered the trustee to release the lien. The trustee appealed.

In its analysis, the Bankruptcy Appellate Panel noted that courts have discretion to decide whether property should be declared abandoned due to a trustee's fail to administer. Thus, even though the property had not been abandoned when the case was closed, since it was property of the estate, the Panel found that the court was within its rights to order it abandoned in response to the circumstances. Factors weighing in the bankrutpcy court's favor include the fact that the trustee partially administered the debt but then filed a no-assets discharge later on. Furthermore, the panel said, the bankruptcy court noted that Joy DeGroot was the only one who suffered any consequences from the failures by Joel DeGroot and the trustee. This, too, was an appropriate reason for the bankruptcy court to exercise its discretion.

Vincent Howard and our Chino individual bankruptcy lawyers applaud the panel for upholding this result. As the panel mentioned, the problems leading to this case came about partly because of Joel DeGroot's failure to lift the stay (as his bankruptcy lawyer advised) and partly because of the trustee's failure to administer the estate completely before discharging the bankruptcy. This is a good example of how divorce and bankruptcy can combine to create unintended consequences, sometimes even for the person who was not in bankruptcy. Financial obligations created by divorce are not generally dischargeable, but failure to tie up loose ends in bankrutpcy court can cause the case to be reopened after everyone thought it was long over. That's why it's very important to get help from an experienced Irvine consumer bankruptcy attorney like Vincent Howard.

If you believe you can't realistically pay off your debts and you'd like to discuss the possibility of a bankruptcy, call Howard Law, P.C., today. You can reach us through our website or call 1-800-872-5925.

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