THE WEALTHY AND THE POOR SEEK CHAPTER 7 BANKRUPTCY PROTECTION


The wealthy and the poor seek Federal Chapter Seven Bankruptcy protection. A prominent Football coach recently has and it is not going well for him.
Posted here by http://www.attorneybankert.com
Terry R. Bankert 235-1970.

USE OF DEFERRED COMPENSATION TO SIDESTEP THE BANKRUPTCY TRUSTEE NOT WORKING.

October 7. 2012 – A week before he filed for bankruptcy, Arkansas football coach John L. Smith arranged to have $600,000 of his $850,000 in pay deferred until after the season –a move that bankruptcy experts say raises legal questions because it could keep that money away from his creditors.[1]

QUESTION DOES THE COACH HAVE THE MEANS TO REPAY HIS DEBT.

a means test…was instituted under 11 USC 707(b)(2)(A). The means test determines the ability of a potential debtor to pay back his or her debts in a Chapter 13 case and permits the court to dismiss or convert a Chapter 7 case if granting relief would be abusive after application of the test. Form B22A, the “Chapter 7 Statement of Current Monthly Income and Means-Test Calculation” (http://www.uscourts.gov/uscourts/RulesAndPolicies/rules/BK%20Forms%201210/B_22A_1210.pdf), is required for every debtor who has primarily consumer debts and wants to file under Chapter 7.[4]

SINCE HIS DEBTS ARE BUSINESS AND NBOT CONSUMER HE AVOIDS THIS LIMITATION THAT CONSUMERS HAVE.

Pursuant to 11 USC 707(a)(3), a debtor whose debts are not primarily consumer debts avoids the means test. Form B22A asks at the beginning if the debtor’s debts are consumer debts and waives the completion of the form upon the declaration that the debts are not “primarily” consumer debts. 11 USC 101(8) defines consumer debt as debt incurred by an individual primarily for a personal, family, or household purpose. [4]

Public records obtained from the university by USA TODAY Sports show that Smith signed an agreement on Aug. 30 to collect a $300,000 payment on Dec. 31, 2012, and another $300,000 on Feb. 23, 2013. The money would come from the Razorback Foundation, a nonprofit fund-raising arm of the athletic department.[1]

The rest of his compensation — $250,000 – would come from the university in monthly payments.[1]

IN BANKRUPTCY THE COURT CONTROLS YOUR ASSETS

In general, the bankruptcy estate controls assets acquired by a debtor before the date of the bankruptcy filing, which in Smith’s case was Sept. 6. Debtors generally can keep what they earn after the filing date.[1]

TRYING TO BE SLICK

By deferring 71% of his Arkansas pay until several months after his bankruptcy filing, Smith could keep it away from his creditors. But the move raises questions that could be subject to a fight in bankruptcy court.[1]

“It was an obvious attempt to avoid having to turn the cash over to the Chapter 7 bankruptcy trustee and alter the amount of income he had to show,” said Scott Ehrlich, a professor and bankruptcy expert at the California Western School of Law.[1]

Consumer bankruptcies under Chapter 7 of the Bankruptcy Code give debtors a discharge from most unsecured debts, provide for an automatic stay against collection efforts on those debts, and permit debtors to have a fresh start after discharge. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) made significant changes to Chapter 7 bankruptcy practice and procedure. Among other things, debtors must attend credit counseling and satisfy a means test to determine whether the bankruptcy filing is abusive and the debtor has sufficient income to pay a substantial portion of his or her unsecured debt.[4]

40 MILLION IN LIABILITIES

In his bankruptcy filing, Smith lists $40 million in liabilities, , most owed to banks and felow investors from a failed real estate investment in Kentucky. He lists just $1.3 million in assets, including $1.2 million tied up in retirement accounts. [1]

BANKRUPTCY PETITION IN CHAPTER SEVEN MAKES ALMOST $20,000 PER MONTH!

Smith states his current gross monthly income as just $19,856.[1]

Smith’s initial Chapter 7 filing in September listed $25.7 million in debt. He later amended that to $40.7 million, blaming land deals gone bad in Kentucky.[2]

ATTORNEY ADMITS ERROR IN FILING TO PROTECT HER CLIENT

Attorney Jill Jacoway, speaking during a hearing in U.S. Bankruptcy Court, said the computer error resulted in her assistant listing $25.7 million in debt. She said the error resulted in a rough draft being filed rather than a completed one.[2]

”We cussed out our computer provider,” Jacoway said. ”We cussed out our computer guys.”[2]

Smith was accompanied by wife Diana and Jacoway during the hearing at which he was asked by trustee John Lee about any possible assets he might have, including any possible inheritance from his parents and brother Bart, who passed away Sept. 17.[2]

CHNGE YOUR PAY SCHEDULE AND KEEP YOUR CASH?

A review of the records obtained by USA TODAY Sports shows changes in how the coach would be paid:
— On April 23, Smith first agreed to a 10-month, $850,000 contract to coach the Razorbacks. His signed agreement stated that he would receive half of his salary ($425,000) from the university in monthly payments, with the remaining $425,000 to come from the Razorback Foundation.[1]

— A month later, on May 22, the Commonwealth of Kentucky ordered a Kentucky bank to garnish Smith’s funds to help satisfy a $865,000 judgment Smith owed to a Louisville investor.[1]

— On July 10, Smith signed his formal contract with the University of Arkansas, but the payment terms had changed. The revised contract said he would be paid $250,000 from the university in monthly installments. The rest — $600,000 — would come from the Razorback Foundation for radio and television appearances, an agreement that was signed on Aug. 30.[1]

CHANGED HIS PAY SCHEDULE TO AVOID BANKRUPTCY OR JUST GOOD BUSINESS
— A week later, on Sept. 6, Smith filed for Chapter 7 bankruptcy, seeking to discharge his debts.[1]

Last week, Smith updated his bankruptcy form to state he had earned $134,832 so far in 2012 from Arkansas. If he had been paid the full amount of his $850,000 contract monthly, it would have been near $425,000.[1]

By contrast, Smith’s predecessor at Arkansas, Bobby Petrino, received his regular pay in equal monthly installments from the university and foundation.[1]

Arkansas has referred questions about Smith’s bankruptcy to his attorney, who didn’t return messages seeking comment.[1]

Ehrlich, the bankruptcy expert, said the change in Smith’s contract should be scrutinized.[1]

WAS THIS A FRAUDULENT TRANSFER?

“Suppose Smith had $600,000 in cash,” Ehrlich wrote in an email. “In contemplation of bankruptcy, he transferred the cash to the university and said, ‘Hold this for me until after I file bankruptcy, then return it to me.’ The attempt to transfer the cash from his hands into someone else’s to prevent his creditors from getting the cash is, without a doubt, a fraudulent transfer under both state and federal bankruptcy law.[1]

A SHIFTY IN ASSETS

“The same is true of the contract alteration. The modifications constituted a shift of a large asset (the contractual right to $600,000) until after the petition was filed. Whether the transfer was hard cash, or a contractual right, the impact on creditors was the same – a shift of $600,000 from the creditors to Smith, by transferring the wealth to the university and getting it back after the petition.[1]

WAS THIS JUST GOOD BANKRUPTCY FINANCE PLANNING?

According to bizfilings.com, which provides legal information to small businesses, because the filing date is the “line of demarcation” in a bankruptcy, anticipating future finances is part of planning a bankruptcy.[1]

IS TIMING THE ISSUE?

The site suggests “a debtor who works on a contract basis (e.g., a building contractor) could postpone forming any lucrative contracts until after the proceeding commences.”
The site recommends waiting, however, to sign such contracts until after the bankruptcy “is completed (not just filed), if at all possible, to avoid any allegation of fraud.”[1]
A meeting of creditors in the Smith bankruptcy is scheduled for Friday in Fayetteville, one day before his team (2-4) hosts Kentucky.[1]

WILL THE TRUSTEE SEND THIS ISSUE TO THE JUDGE?

”It’s possible that John L. Smith will never see a judge,” Jacoway said. ”It is very possible that everything is worked out, that everything is A-OK.”[2]
Jacoway said the coach’s bankruptcy case could last as little as 90 days or up to two years.[2]

A new hearing has been scheduled next month in Arkansas football coach John L. Smith’s bankruptcy case.[3]

The hearing on November 14th is to discuss a request by the bankruptcy trustee to add special legal counsel.[3]

Smith filed for Chapter 7 liquidation of his debts after some Kentucky developments he invested in went belly up.[3]

The debtor’s prime motivation to file a Chapter 7 bankruptcy case is to obtain a fresh start, unburdened by past debt. The debtor is exchanging his or her nonexempt property for the forgiveness of dischargeable debts.[4]

Under 11 USC 727(c), the trustee, a creditor, or the U.S. trustee may object to the granting of a discharge. A party in interest may request that the trustee investigate the acts and conduct of the debtor to determine whether ground exists for denial of discharge. 11 USC 727(c)(2). Under 11 USC 727(d), on request of the trustee, a creditor, or the U.S. trustee and after notice and a hearing, the court shall revoke a discharge granted under 11 USC 727(a) if
•the discharge was obtained through fraud of the debtor and the requesting party did not know about the fraud until after the discharge was granted;
•the debtor knowingly and fraudulently failed to report property, or failed to surrender property that the debtor acquired or became entitled to acquire which would be property of the estate;
•the debtor refuses, in the case,
◦to obey a lawful order of the court;
◦on the ground of privilege against self-incrimination, to respond to a material question approved by the court or to testify, after the debtor has been granted immunity with respect to the matter concerning which such privilege was invoked; or
◦on a ground other than the properly invoked privilege against self-incrimination, to respond to a material question approved by the court or to testify;[4]
•the debtor failed to explain satisfactorily:
◦a material misstatement in a U.S. trustee audit; or
◦a failure to make available for inspection all necessary accounts, papers, documents, financial records, files, and all other papers, things, or property belonging to the debtor that are requested for a U.S. trustee audit.[4]

—end—

[1]
http://www.usatoday.com/story/sports/ncaaf/sec/2012/10/07/john-l-smith-arkansas-bankruptcy/1618249/

[2]
http://msn.foxsports.com/collegefootball/story/arkansas-john-smith-faces-creditors-in-bankruptcy-case-101212

[3]
http://www.ktts.com/news/174710201.html

[4]From ICLE
Handling Consumer and Small Business Bankruptcies in Michigan
Edited by Richardo I. Kilpatrick, Stuart A. Gold, and John T. Gregg

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