The “forward-looking approach” is the appropriate method to determine a Chapter 13 debtor’s projected disposable income, according to a recent Supreme Court decision.  See Hamilton v. Lanning, 130 S.Ct. 2461 (2010).  The Court’s opinion adopted the majority view among circuits that allows a bankruptcy court to take into account, in exceptional cases, “known or virtually certain changes in the debtor’s income” that will occur after plan confirmation when calculating projected disposable income.
 The Bankruptcy Code requires that a Chapter 13 debtor to pay unsecured creditors in full or pay the unsecureds all of the debtor’s projected disposable income over the life of the plan.  Because the term projected disposable income is not defined in the Code, different methods have arisen as to how to calculate projected disposable income, and two approaches have emerged for its calculation: the forward-looking approach and the mechanical approach.  Both methods first examine the debtor’s disposable income, which is defined by the Code as “current monthly income received by the debtor . . . less amounts reasonably necessary to be expended . . . .” See § 1325(b)(2)(this section goes on to list what constitutes “amounts reasonably necessary to be expended”).   Further, the Code defines “current monthly income” as the debtor’s average income over the six months prior to the debtor’s bankruptcy filing. See § 101(10A).  To determine the debtor’s projected disposable income, the currently monthly income is multiplied by the months of the debtor’s proposed plan. The difference between the forward-looking approach and the mechanical approach occurs is what discretion a court has in modifying the projected disposable income based on the circumstances in each case. 
 In Hamilton, both parties agreed on how to determine projected disposable income in most cases.  The petitioner—who favored the mechanical approach—argued, however, that the agreed-upon method should apply in every case, whereas the respondent contended that “in exceptional cases, where significant changes in a debtor’s financial circumstances are known or virtually certain, a bankruptcy court has discretion to make an appropriate adjustment.”  The Court believed that the latter method—the forward looking approach—was correct. 
 The Court first looked to the normal meaning of ‘projected’ in explaining its decision.  “[F]uture occurrences,” the Court stated, “are not ‘projected’ based on the assumption that the past will necessarily repeat itself.”  The Court also noted that ‘projected’ appears in many federal statutes but is rarely used to mean simple multiplication.  In contrast, Congress uses unambiguous language in the Bankruptcy Code when it promulgates multiplication by using some form of the word ‘multiply.’  By choosing not to use ‘multiply’ when calculating projected disposable income, the Court reasoned, Congress rejected the mechanical approach.  This conclusion follows case law on this issue before the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”), the Congressional bankruptcy overhaul that defined ‘disposable income’ for the first time.  Before BAPCPA, most courts applied the mechanical approach but allowed discretion to change the projected disposable income in exceptional circumstances where foreseeable changes in the debtor’s income dictated it. Thus, the majority of courts utilized the forward-looking approach pre-BAPCPA to determine projected disposable income, and because Congress did not define the term in the bankruptcy amendments, the Court decided that Congress intended to allow for changes to projected disposable income in certain exceptional circumstances.  According to the Court, because Congress did not define ‘projected’ to have a specialized meaning in the BAPCPA, it intended for the courts to continue to interpret projected disposable income the way most courts had pre-BAPCPA.
 There are also practical reasons why the mechanical approach was inappropriate, according to the Court.  If a debtor’s projected disposable income were overstated because of a significant, and foreseeable, decline in income during the life of the Chapter 13 plan than in the six months prior to filing, the debtor would not be able to file a confirmable plan because he or she would not be able to make the payments.  Inversely, if the debtor’s projected disposable income were understated, unsecured creditors would not receive all of the debtor’s projected disposable income as required by the Code.  The forward-looking approach, therefore, allows a court to obviate these results by changing the projected disposable income to reflect foreseeable and virtually certain changes in a debtor’s income during the life of the plan.
 The Supreme Court has finally decided an oft-litigated situation of how much a debtor has to pay into the plan in certain circumstances.  The Hamilton opinion can be helpful to creditors considering whether to object to a Chapter 13 plan because they believe that a debtor has more disposable income that the plan proposes.  A creditor still may be able to object and succeed on such a basis, of course, but creditors and creditors’ attorneys now have a better outline of how the bankruptcy court will calculate projected disposable income and can feel more comfortable when deciding whether to object to a plan on that basis.

Brandon Barber’s $47.8 million in debt will not be discharged through Chapter 7 bankruptcy, according to an opinion recently issued by Bankruptcy Judge Ben T. Barry.   In his opinion, Judge Barry found that there was ample evidence to deny Barber his discharge under Bankruptcy Code section 727.  Legacy National Bank, led by Mitchell Williams attorney Marshall Ney, had filed a Complaint in February to deny Barber his discharge under Sections 727(a)(2)(A) and 727(a)(4)(A) of the Bankruptcy Code.
 Under Section 727(a)(2)(A), Legacy had to prove that Barber “with intent to hinder, delay, or defraud a creditor . . . has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed . . . property of the debtor, within one year before the date of the filing of the petition.”  The court found that Legacy met that burden by proving that Barber had transferred and concealed money with the intent to hinder, delay and defraud his creditors on multiple occasions within a year prior to his bankruptcy filing.  Three of the transfers outlined by the court involved Barber’s close friend James Van Doren, a New York resident, or Doren’s entity “Epsilon.”  The court also found that Barber used an entity he created called NWARE to transfer and conceal money from his creditors. 
 The first Van Doren-transfer occurred when Barber gave a briefcase filled with $30,000 cash to Van Doren while the two were in New York.  Barber testified that he gave the money to Van Doren because he did not feel safe carrying it with him and that he could not put it in a checking account.  The court, however, found that Legacy had demonstrated sufficient proof that the money was given to Van Doren so Barber could then use Van Doren’s credit cards for his personal use, including $2500 for one night at a New York nightclub.  The court found that the second transfer—a $64,000 check that was made out to Barber who then signed it over to Van Doren—was for the similar purposes.  The third transfer included $180,000 that Barber sent to his attorney with the instructions that $150,000 of those funds be transferred to Van Doren.  The court concluded that all three of these transactions were made with the intent to hinder, delay, and defraud Barber’s creditors. 
 Barber’s formation and use of an entity he created named NWARE also led the court to deny Barber’s discharge.  Barber created NWARE less than a year prior to his bankruptcy filing, and, according to the court, used a checking account opened in the entity’s name as his personal checking account.  Barber admitted as much, but his explanation that he had to use that account for his personal expenses because he could not open an account under his own name did not persuade the court.  In addition to finding that Barber had several other bank accounts in his name at the time he opened the NWARE account, the court noted that the funds in Barber’s pre-existing accounts began decreasing significantly in the year prior to the bankruptcy filing while hundreds of thousands of dollars flowed into the NWARE account.  These facts, taken together, led to court to believe that Barber was attempting to prevent creditors from reaching his assets.
 The court also found that Barber’s discharge should be denied under Section 727(a)(2)(4).  To succeed under that section, Legacy had to prove that
 1. the debtor made a statement under oath;
 2. the statement was false;
 3. the statement was made with fraudulent intent;
 4. the debtor knew the statement was false; and
 5. the statement related materially to the debtor’s bankruptcy.
(citing Helena Chem. Co. v. Richmond (In re Richmond), 429 B.R. 263, 307 (Bankr. E.D. Ark.
2010)(other citations omitted)).  Such a statement may include a false disclosure or omitted disclosure on the debtor’s bankruptcy schedules.  Although the court acknowledged that bankruptcy courts often allow debtors to amend their schedules freely, it is not required to allow a debtor to amend if the debtor acted in bad faith.
 In Barber’s case, he omitted hundreds thousands of dollars in loans made to the NWARE account in the year prior to bankruptcy filing.  He amended his schedules several times after his filing to reflect loans made to that account.  The court, however, refused to allow his attempt to amend his schedules the day before trial to reflect a $111,828.98 loan that had not been disclosed.  Thus, the court found that Barber knowingly made a false statement under oath with fraudulent intent, and of course, the bankruptcy schedule was materially related to the debtor’s bankruptcy. 
 Based on the abundant evidence presented at trial, the court found that Barber was not entitled to a discharge of his debts.  The decision comes as a victory to the plethora of creditors seeking to recover at least some of the money lent to Barber before his high-profile lifestyle and the fallout of the northwest Arkansas economy led to his financial ruin. 

[1] The court’s full opinion can be found on the Bankruptcy Court website at http://www.arb.uscourts.gov/orders-rules-opinions/opinions/barry/Barber.pdf

Living in a $400,000 home and incurring excessive monthly living costs while trying to shed unsecured debt through bankruptcy is an abuse of the bankruptcy system and is grounds for dismissal under § 707(b)(3)(A) and (B), according to an Ohio bankruptcy judge.  In In re Dupuy, 433 B.R. 226 (Bankr. .S.D. Ohio 2010), the court found that the debtor and his non-filing wife were living above their means and that, using the totality of the circumstances test, the debtor’s Chapter 7 filing was in bad faith.  The debtor was attempting to reaffirm his $400,000 home that had a total of $324,757 remaining on two mortgages while trying to discharge $115,900 in unsecured debt.  The unsecured debt consisted of nine credit card debts, which were for “miscellaneous purchases” and/or “cash advances” in amounts ranging from $4,000 to $27,500. 
 The debtor defended by arguing that if he discharged the debt on his house it would leave his non-filing wife—who was unemployed but apparently attempting to start a consulting business—with a debt that she could not service. The debtor also contended that the unsecured debt was solely his debt and that he could not repay it on his dwindling social security and other retirement benefits.  The court disagreed with the debtor, finding that if they were to sell their house, which the court noted they were in the extremely fortunate position to be able to do, they would have enough money to live comfortably and still be able to pay fifty-four percent of the unsecured debt over a five-year plan. 
 Additional facts persuading the court to dismiss the case were the other living expenses that the debtor refused to reduce.  Along with $2,248.81 in monthly mortgage payments, the debtor continued to pay a monthly telephone expense of $285, a monthly cable expense of $275, and a monthly internet expense of $65.  The court concluded that such expenses were not necessities for a Chapter 7 debtor.  If these expenses, among others, were cut, the debtor would be able to make a meaningful distribution to unsecured creditors.  All of these factors, taken together, led the court to dismiss the case for abuse and for the totality of the circumstances.
 Creditors that receive notice that a borrower has filed Chapter 7 bankruptcy should be sure to look closely and see if the borrower is truly attempting to get a fresh start or is merely trying to get rid of certain debt while continuing to live above his or her means.

In United Student Aid Funds, Inc. v. Espinosa, the United States Supreme Court  resolved the circuit split on whether the lack of an adversarial proceeding or finding of undue hardship before the discharge of student loan debt rendered the discharge void under Rule 60(B)(4).  130 S. Ct. 1367 (2010).  The Court answered in the negative; while the lack of an adversarial proceeding or a finding of undue hardship is legal error, the Court held that it does not render the order void.  Id. at 1380.

Under Chapter 13 of the Bankruptcy Code, a debtor may discharge student loan debts only if an undue hardship would be imposed upon the debtor if the debt was not discharged.  Id. at 1373; 11 U.S.C. §§ 1328, 523(a)(8).  The Federal Rules of Bankruptcy Procedure require that the undue hardship determination be made in an adversarial proceeding that must be initiated by the debtor by serving a summons and complaint upon the holder of his or her loan.  Id.  In United Student Aid Funds, the debtor was granted discharge of student debts both without an adversarial proceeding, as the debtor never served the loan holder, and without a determination of undue hardship.  Id. at 1373-74.  In affirming the order, the Supreme Court held that the loan holder’s due process rights were not violated by the failure of the debtor to serve a summons and complaint because the adversarial rule is procedural and the loan holder had notice of the proceeding by other means.  Id. at 1378.  Further the Court found that the failure to make a determination of undue hardship, while a legal error, did not rise to the level of jurisdictional and notice requirements that qualify for void judgment relief under 60(B)(4).  Id. at 1379.  The requirement of a finding of undue hardship does not limit the jurisdiction of the bankruptcy court nor does it impose a requirement that, if violated, would render a judgment void.  Id.

The Supreme Court decision in United Student Aid Funds makes it all the more important for creditors to be abreast of appeal deadlines and to timely file objections as now, at least in regard to student loan discharges, 60(B)(4) will not render the judgment discharging a student loan void.

In Arkansas, to perfect a security interest in a vehicle a secured party must have an (1) authenticated security agreement that reasonably describes the collateral, (2) must have given value, (3) the debtor must have rights in the collateral, and (4) the security interest must be noted on the certificate of title for the vehicle.  To avoid a misleading description, the vehicle identification number (“VIN”) of the vehicle should always be a part of the collateral description. 

A recent Eastern District of Arkansas bankruptcy case proved just how important a VIN can be to a secured party’s interest.  In In re Johnson, 422 B.R. 183 (Bankr. E.D. Ark. 2010), the trustee objected to relief from stay being granted to a secured party because the description of the collateral in the security agreement did not match the description on the certificate of title.  While the VIN was accurately reflected on both documents, the description on the security agreement stated “2004 R-Vision Condor 1351 Recreational Vehicle,” while the description on the certificate of title was “2003 Ford F-5 MH.”  Id. at 184.  The trustee argued that these two descriptions were inconsistent and therefore the secured party was not perfected.  Id.   The court found, however, that because the VIN was the same on both documents and there was a logical explanation for the inconsistency of the two descriptions, the secured party was perfected.  Id. at 185.  An expert explained that the 2004 R-Vision Condor motor home was mounted by the manufacturer onto a 2003 Ford Chassis; thus, the security agreement described the top half of the vehicle and the certificate of title described the bottom half.  Id. at 184.  Because the VIN was accurately reflected on both documents, the otherwise misleading description was rectified. 

As a VIN is a unique identifier of a vehicle, it provides an accurate way to describe such collateral.  Lenders, however, should always be aware of what the VIN number on their loan documents actually describes.

In a 2010 Western District of Arkansas bankruptcy decision, the court held that a single female with no children but who intermittently had family members stay at her home qualified as head of household for homestead exemption purposes.  In re Purvis, ___B.R.___, 2010 WL 1544348 (Bankr. W.D. Ark. 2010).  Article 9 of the Arkansas Constitution exempts the homestead of any Arkansas resident who is married or head of a family from certain liens and judgments.  Ark. Const. art. 9, § 3.  Arkansas courts consider three factors in determining whether a debtor qualifies as head of family: (1) An obligation on the debtor to support others residing in the household; (2) existence of a corresponding state of dependence upon those being supported; and (3) existence of a role of authority for the head of the family.  In re Purvis, 2010 WL 1544348 at *1.  The debtor does not have to be married or a parent but “something more than a mere aggregation of individuals residing in the same house is required.”  Id. at *2 (internal quotation omitted).  The homestead exemption is meant to protect families from dependence and want and is to be liberally construed in favor of the person asserting the exemption.  Id.

In In re Purvis, the court analyzed Purvis’s relationship with three individuals that lived with her over the previous six years to determine her eligibility as head of family.  Id.  The presence of a fiancé who was unemployed for only six months did not qualify Purvis as head of family; however, the other two relationships combined to qualify Purvis as head of household.  At one time or another, Purvis had one or the other of her two brothers living with her.  One brother (Gary), in the midst of a separation from his wife, stayed with Purvis several nights a week over a three year period; he spent the other nights at his mother’s home.  Gary was not employed and did not contribute to household expenses.  Prior to his death, the second brother (Cecil) resided with Purvis several nights a week and resided at his own residence or his mother’s the rest of the time.  Cecil had limited abilities due to two brain surgeries.  The court concluded that the “obligation factor” for determining head of household did not have to be one of a legal nature and that if Purvis felt a moral obligation to support her brothers that would satisfy the requirement.  Cecil’s health conditions and Gary’s financial dependence were enough to satisfy the second factor of “corresponding state of dependence.”  The third factor, existence of a role of authority, was deemed to be satisfied by Gary’s testimony that he was under Purvis’ authority when he is in her home.  Despite the fact that Cecil was deceased prior to Purvis filing bankruptcy, she is still entitled to the exemption.  “A homestead claimant who acquires the right to a homestead exemption is not subsequently deprived of the homestead exemption by the death of family members.”  Id. at *3.  As Purvis’s relationships with her brothers satisfied the three factors required to qualify for head of household, Purvis was entitled to the homestead exemption.

In re Purvis provides an example of how the homestead exemption works in Arkansas.  The Arkansas Constitution calls for a married person or head of family to qualify for the exemption; it is important to keep in mind that “head of family” is a flexible concept and may apply to    non-traditional circumstances.  Lenders should always ensure that the “homestead exemption waiver” language is in their loan documents, even if the borrower does not appear to qualify for the exemption at first glance.

A recent decision of the Eighth Circuit Court of Appeals serves as a valuable reminder of the potentially harsh consequences of using an incorrect name on an UCC-1 Financing Statement.  In Hastings State Bank v. Stalnaker (In re EDM Corp.), the Court of Appeals upheld the bankruptcy court’s ruling that a lien was not properly perfected because of the inclusion of the debtor’s “doing business as” name on a UCC-1 financing statement.  As a result, the lender, Hastings State Bank, lost its first priority lien position in the collateral.

The legal corporate name of the debtor in the Hastings case was “EDM Corporation.” but for several years the debtor had also operated under the trade name of “EDM Equipment.”  Hastings State Bank filed a financing statement identifying the debtor as “EDM Corporation d/b/a EDM Equipment.”  Two subsequent lenders searched the UCC records for “EDM Corporation” but the search logic did not reveal Hastings financing statements.  None of these two subsequent lenders searched the UCC records for “EDM Corporation d/b/a EDM Equipment” and both filed financing statements using only the debtor’s legal name “EDM Corporation.”  After the debtor filed bankruptcy, the bankruptcy court determined that Hastings State Bank had not perfected its security interest and the subsequent lenders had priority in the proceeds of the collateral.

According to the court the financing statement filed by Hastings did not provide the legal name of the debtor as required by §9-502 of the UCC and it was seriously misleading under §9-506 of the UCC.  Hastings failed in its obligation to discover and use the debtor’s correct name.  As a result, the purpose of filing a financing statement, i.e. to let other creditors know of the existence of a lien, was not met by Hastings’ financing statement.  The court noted that the proper way to include the trade name on the UCC-1 was to list it as other or additional names on the form “but not in place of, or as part of, the debtor’s organizational name.” 

It is a common mistake to incorrectly fill in a debtor’s name on a financing statement. To avoid the serious consequences faced by Hastings State Bank, lenders would be well-advised to remind their loan officers of the importance of determining the proper legal name of a borrower and of making sure UCC-1 financing statements are properly filled out.  A quick check of the Secretary of State corporate records could make all the difference to recovering on a defaulted loan versus having to recognize a total loss!

The circuits have been in debate over whether a debtor can deduct a vehicle which he owns free and clear from his projected disposable income.  Under the means test of 11 U.S.C. § 707(b)(2), an above median income debtor may deduct applicable monthly expenses from his projected disposable income.  The debate rests largely on the definition of “applicable” as used in relation to ownership costs of vehicles.   Does the ownership cost of a vehicle include fictional payments for a car already fully paid for?

The circuits which have answered in the affirmative use the “plain language approach” to justify their conclusion.  See Tate v. Bolen, 571 F.3d 423 (5th Cir. 2009); Ross-Tousey v. Neary, 549 F.3d 1148 (7th Cir. 2008).  Under the plain language approach, the courts have distinguished the word “applicable” from “actual,” stating that deduction applies to a debtor if he possesses a vehicle regardless of whether there is an actual expense.  See Ross-Tousey, 549 F.3d at 1157–58.  The circuits that have answered in the negative, including the Eighth Circuit, have held that a debtor cannot deduct the expense of a vehicle owned free and clear.  See Ransom v. MBNA, 577 F.3d 1026, 1029 (9th Cir. 2009); see also In re Wilson, 577 F.3d 1026 (B.A.P. 8th Cir. 2008).  These circuits are split between the “IRM approach” and the “statutory language, plainly read” approach.  Id. at 1029–30.  The IRM approach uses the IRS guidelines to determine how vehicle expenses are calculated; per the IRS guidelines a debtor must have a car payment to take an ownership cost deduction.  Id. at 1029.  The statutory language approach, which attempts to construe the statute as consistent with Congress’s intent that “debtors repay creditors the maximum they can afford,” interprets the statute to mean that an “ownership cost” is not applicable or actual when there are no payments being made on the vehicle.  Id.

The case currently before the Supreme Court, Ransom v. MBNA, will hopefully settle the debate. In Ransom, the above median income debtor deducted $471.00 from his monthly disposable income for a 2004 Camry which he owns free and clear.  577 F.3d at 1027.  MBNA objected to this deduction and confirmation of the plan.  Id. at 1028.  The bankruptcy court and the bankruptcy court of appeals agreed that the debtor could not deduct a vehicle ownership cost for a vehicle he owned free and clear.  Id.   The Ninth Circuit affirmed, holding that it would be “ironic . . . to diminish payments to unsecured creditors in this context on the basis of a fictitious expense not incurred by a debtor.”  Id. at 1030.  The Supreme Court’s decision on this case will likely impact the significance of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”).  The BAPCPA was enacted to require above-median income debtors to make more funds available to unsecured creditors by limiting the court’s authority to allow expenses.  In re Wilson, 383 B.R. at 733.  As the Eighth Circuit B.A.P. stated in In re Wilson, “[i]t would turn the logic of BAPCPA on its head to allow above-median debtors such a deduction.”  Id. at 734.  However, those who are proponents of the deduction have stated that without it debtors are encouraged to purchase new vehicles before filing for bankruptcy and will benefit from both a new vehicle and the deduction.

Creditors that have taken collateral that the borrower already owned may want to check their loan documents and see whether the collateral is being used as a “tool of the trade.”  If it is, the creditor may be in an unfortunate position should the borrower file bankruptcy, according to a recent opinion handed down by Judge Ben T. Barry, United States Bankruptcy Judge for the Western District of Arkansas.  Pursuant to 11 U.S.C. § 522(f)(1)(B)(ii), an individual debtor may claim exemptions in certain “tools of the trade” if they are “reasonably necessary to the debtor’s trade or business” and avoid a creditor’s lien to the extent the lien impairs the exemptions. 
 In In re Osborn, Case No. 3:09-bk-73333 (Bankr. W.D. Ark. Oct. 5, 2009), the debtor, a fishing guide who spent from three to seven days a week guiding on the river, filed a Motion to Avoid Nonpossessory Nonpurchase-Money Security Interest (“Motion to Avoid). At the same time the creditor bank filed a Motion for Relief from the Stay and for Abandonment of Property (“Motion for Relief”).  At the hearing, the debtor and the bank stipulated to certain facts: (1) the bank had a valid, perfected security interest in a Nissan Frontier, a Honda ATV, a fishing boat and trailer, a Mercury motor, and a Kubota tractor (collectively, the “collateral”); (2) the bank’s interest was a non-possessory, non-purchase-money security interest; (3) the Bank’s interest had a value of $44,310.60; and (4) if the court found that the collateral were tools of the trade, the debtor had an exemption of $12,105.00 pursuant to 11 U.S.C. §§ 522(d)(5) and (d)(6). 
 Based on testimony of the debtor, the court deemed the Nissan Frontier, the boat, the trailer, and the motor (“exempted collateral”) to be reasonably necessary to the debtor’s business.  The court found that the debtor did not need the Kubota tractor or the ATV for his business and therefore were not tools of his trade.  Thus, the debtor could avoid the bank’s interest in the Nissan, boat, motor, and trailer to the extent the lien impaired the tools of the trade exemptions. The court then heard testimony from the debtor and the bank’s employees as to the fair market value of the exempted collateral, which the court found to be $16,560.00.
 The court then had to determine whether the bank’s lien actually impaired the debtor’s allowed exemptions.  11 U.S.C. § 522(f)(2) gives the formula for determining whether a lien impairs an exemption:
 
a lien shall be considered to impair an exemption to the extent that the sum of (i) the lien; (ii) all other liens on the property; and (iii) the amount of the exemption that the debtor could claim if there were no liens on the property; exceeds the value that the debtor’s interest in the property would have in the absence of any liens. 
11 U.S.C. § 522(f)(2).  The bank’s lien was stipulated to be $44,310.60.  There were no other liens on the property.  The parties also stipulated that the debtor was entitled to an exemption of $12,105.  From this total––$56,415.60—the court subtracted the fair market value of the property if no liens existed––$16,560.00—to calculate how much of the bank’s lien could be avoided: $39,855.60.  Now the bank’s remaining lien on the property was just $4455 ($44,310.60–$39,855.60).

 The bank was saved, however, by their Motion for Relief because the debtor failed to correctly file a statement of intention indicating what he planned to do with the property pursuant to 11 U.S.C. § 362(h)(1).  The debtor filed the requisite statement of intention indicating that he wanted to redeem the property.  Tools of the trade, however, cannot be redeemed—only “tangible personal property intended primarily for personal, family, or household use” can be.  11 U.S.C. § 722.  The court found that although the bank was not entitled to relief from the stay for lack of equity because the debtor now had approximately $12,000 worth of equity in the exempted collateral, it was entitled to relief from the stay for cause because the debtor had failed to abide by 11 U.S.C. § 362(h)(1). 
 Banks should be aware of any loans on their books such as the one to this fishing guide.  Although this situation will mostly like arise with smaller loans to individuals who run their business as a sole proprietor, such as a fishing guide, duck hunting guide, or landscaper, for example, a bank can save itself a lot of money and grief by documenting exactly what collateral is going to be included in the loan and more specifically, whether each piece of collateral is a tool of that borrower’s particular trade. Banks may also consider adding conspicuous waiver language in which a borrower waives its tools of the trade exemptions in bankruptcy, just as many banks currently do with homestead exemptions.  Most states allow homestead waiver exemptions and most likely would do the same with tools of the trade waivers, if challenged.

Debtors may not be able to obtain a waiver of discharge as easily as once thought.  The Eighth Circuit Bankruptcy Appellate Panel’s (the “BAP”) decision in In re Asbury to allow bankruptcy court’s to consider the best interests of the parties before approving a waiver of discharge may frustrate the attempts of debtors trying to escape bankruptcy unscathed.  423 B.R. 525 (8th Cir. B.A.P. 2010)  Based on this holding, if the court finds that the parties’ interests will not be better served outside of bankruptcy then it does not have to approve the waiver of discharge.

            In In re Asbury, the debtors filed a voluntary Chapter 7 bankruptcy petition with claims in excess of $11 million.  Creditors subsequently filed a number of adversary proceedings against the debtors.  The debtors tried to get out of the bankruptcy asserting that they did not have the funds to litigate all of the adversary proceedings.  The bankruptcy court denied the debtors’ attempted waiver of discharge finding that the debtors did not clearly understand the legal consequences of a waiver, and the waiver would prejudice the creditors.  The debtors appealed, arguing that the bankruptcy court exceeded the scope of its authority under §727(a)(10) by considering the best interests of the parties.

            The BAP upheld the bankruptcy court’s denial of the debtor’s waiver of discharge stating that once a debtor chooses to deal with his creditors in the bankruptcy arena, the bankruptcy court has a duty to protect the interests of both parties, not just the debtor’s.  BAP refused to allow the debtor to waive his discharge in an effort to avoid the perceived consequences of his bankruptcy filing and the subsequent adversary proceedings.