Monthly Archives: February 2013

US Supreme Court denies petition to auction disabled man’s home

FOR IMMEDIATE RELEASE

Washington, DC – February 19, 2013

When Michigan homeowner Steven Schafer became disabled as an adult, he had no idea he would one day be in  legal fight before the US Supreme Court to save his home. Unable to continue to work and living on a fixed monthly income from Social Security, he could not afford to repay his medical bills. When crushing debt forced him into bankruptcy in 2009, his only asset was his home in a middle class neighborhood in western Michigan.[1]

The Bankruptcy Code creates a federal system of bankruptcy courts but allows individual states to determine what property their residents may keep (or exempt) after declaring bankruptcy.[2] Under Michigan law, the homes of seniors and people with disabilities are given special protection when they file for bankruptcy.[3]

Trustees are appointed in bankruptcy cases to find hidden and unprotected assets. They receive a commission for any property they liquidate. Although Mr. Schafer exempted his home under Michigan law, the trustee assigned to his case tried to sell the house and force Mr. Schafer out. The trustee refused to follow the Michigan law, claiming it was unconstitutional under the Supremacy Clause and the less well known Bankruptcy Clause of the US Constitution. The legal battle that followed lasted 4 years and went all the way to the US Supreme Court, after a federal appeals court upheld the law last year.[4]

On appeal, the trustee named both the disabled homeowner and the State of Michigan as respondents to his legal challenge. The Michigan Attorney General, representing the State of Michigan, has argued that special protections are needed under state law to create a safety net for the state’s most fragile class of individuals. Under the Michigan exemption system, a bankrupt homeowner may exempt up to $35,300 of his or her interest in a residence. If the homeowner is age 65 or older or is disabled, a higher exemption amount, $52,925, applies.[3]

At a court hearing on February 6, 2013, the trustee would not provide details about the amount of legal fees he has amassed. The trustee only confirmed on the record that “this is not a surplus case.” Scott Zochowski, the pro bono attorney who represents the homeowner, says in plain English that means that a sale of the home would have only covered the trustee’s legal bill.

“It is now clear that states have the right to pass laws that make homes of the elderly and disabled off limits to creditors,” said Mr. Zochowski. “Before our case, bankruptcy trustees had bullied other senior and disabled homeowners into large settlements when faced with this sort of constitutional challenge.[5] It’s a cash grab targeting a disadvantaged group, and we have put an end to it.”

The case went to a closed-door session of the Supreme Court on Friday February 15, 2013, and the Court entered an order denying the trustee’s petition on Monday February 19, 2013.[6] The highest court having now ruled on this issue, Mr. Schafer’s home has been saved from auction. However, as bankruptcy trustees have seen their revenue drop in recent years due to falling rates of bankruptcy filings, similar challenges to state laws are being made by trustees across the country. Other federal courts have already begun to apply this case originating out of Michigan as precedent.[7]

Citations:

[1] In re Steven Schafer, Bankr. W.D. Mich. Case No. 09-03268

[2] 11 USC 522, US Bankruptcy Code: Exemptions

[3] MCL 600.5451(1)(n), Michigan homestead exemption

[4] Richardson v. Schafer, US Court of Appeals for the Sixth Circuit Case No. 11-1340

[5] E.g., In re Pontius, Bankr. W.D. Mich. Case No. 08-04124; In re Dorothy Jones, B.A.P. 6th Cir. Case No. 10-8031(case settled on appeal); In re Wallace 347 B.R. 626 (Bankr. W.D. Mich. 2006); and In re Bratsburg, Bankr. W.D. Mich. Case No. 09-06721

[6] Richardson v. Schafer, US Supreme Court Case No.12-643

[7] In re Westby, US Bankruptcy Appellate Panel for the 10th Circuit Case No. 12-27

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Supreme Court considers constitutionality of Michigan homestead law

FOR IMMEDIATE RELEASE

Zochowski Law, PLLC, 100 E. Big Beaver Rd., Ste. 900, Troy, MI 48083

Contact:          Scott Zochowski

Office:            (248) 548-6800

Cell phone:      (248) 224-8997

Email:              scott@zlpllc.com

Date:               February 13, 2013

WASHINGTON, DC – The US Supreme Court justices will meet privately this Friday at a closed-door session to decide whether to hear a case challenging the constitutionality of a Michigan law.[1] The state law protects the homes of Michigan seniors and people with disabilities when they file for bankruptcy.[2] The Court has been asked to consider if such state laws conflict with federal law and the Constitution.

The Michigan law was upheld by the US Court of Appeals for the Sixth Circuit in August 2012.[3] A Kansas law that faced a similar challenge was found constitutional in the Tenth Circuit earlier this month [4], but related challenges are still pending in federal courts across the country.

The Michigan Attorney General has argued that special protections are needed to create a safety net for the state’s most fragile class of individuals. The Michigan law provides a homestead exemption that lets seniors and people with disabilities keep their homes if they need to file for bankruptcy to get a fresh start. Under the Michigan exemption system, each homeowner may exempt up to $35,300 of his or her interest in a residence. If the homeowner is age 65 or older or is disabled, the exemption amount is $52,925.[2]

The homeowner in this case, Mr. Schafer, became permanently disabled as an adult. His savings were quickly spent on medical bills, and his income from disability benefits was not enough to pay all of his debt. His only valuable asset is his home in a middle class neighborhood in western Michigan. He filed for bankruptcy, seeking to protect his home using Michigan’s homestead exemption law. But the bankruptcy trustee ignored the state law and attempted to sell the home.

At a recent court hearing on February 6, 2013, the trustee refused to provide details about the amount of legal fees he has amassed over the last 4 years of appeals. The trustee only confirmed “this is not a surplus case.” Scott Zochowski, the attorney for Mr. Schafer, maintains you can reasonably conclude from the trustee’s comments that if Mr. Schafer’s home is ultimately sold, any proceeds may only go toward the trustee’s legal bill and not repay any of the creditors. “On a larger scale, this case is about states’ rights to pass laws that make the homes of the elderly and disabled off limits to aggressive bill collectors,” said Mr. Zochowski.

A decision as to whether to accept the case is expected from the Supreme Court next Tuesday. Oral argument could be scheduled for later this spring.

Citations:

[1] Richardson v. Schafer, US Supreme Court docket: http://www.supremecourt.gov/Search.aspx?FileName=/docketfiles/12-643.htm

[2] MCL 600.5451(1)(n), Michigan homestead exemption: http://www.legislature.mi.gov/%28S%285hjnv4vjk1ngfu45oln12kmy%29%29/mileg.aspx?page=GetObject&objectname=mcl-600-5451

[3] Richardson v. Schafer, US Court of Appeals for the Sixth Circuit 08/20/2012 published opinion: http://www.ca6.uscourts.gov/opinions.pdf/12a0274p-06.pdf

[4] In re Westby, US Bankruptcy Appellate Panel for the 10th Circuit, 02/04/2013 published opinion: http://bankruptcykansas.info/wp-content/uploads/2013/02/Westby-BAP10-Decision-02-04-2013.pdf

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January is the time of year when 1099 forms start to be distributed. Most people associate this tax form with independent contract income. However, 1099-A and 1099-C forms are used post-mortgage foreclosure in circumstances where the house sold for less than the balance owed on the loan (i.e., there was a deficiency) and the mortgage company has stopped collection on the outstanding balance.

Receiving a 1099-A form will NOT cause you to owe income taxes on the mortgage deficiency balance. 1099-A (Abandonment of Property) is the appropriate form to receive if either the account at issue was subject to a bankruptcy discharge or the account at issue was a principal residence AND the mortgage company voluntarily forgave the debt (per the Mortgage Forgiveness Debt Relief Act).

Receiving a 1099-C form (Cancellation of Debt) DOES create a taxable event. This form is commonly used by collection agencies if a debt is settled for less than 100% owed. Basically, the forgiven debt is treated like a gift to you that has value similar to wage income, and you must pay income tax on this amount. Recently, with the housing market crisis and foreclosure sale prices being very low, more and more mortgage deficiencies lead to 1099-C forms being filed by lenders. Under current law as of 2012, a mortgage company may not file a 1099-C form as to a borrower post-foreclosure if the homeowner has discharged the contractual liability in bankruptcy or if the debt was secured against a principal residence and voluntarily forgiven by the mortgage company.

When in doubt, consult with a licensed attorney or CPA in your area. Our office specializes in mortgage foreclosure and consumer bankruptcy. We have successfully represented hundreds of homeowners in the Michigan and federal courts.

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February 2, 2013 · 3:35 pm