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Free Information on Bankruptcy Law under the United States Bankruptcy Code and In-Depth Descriptions of the Difference Between Chapter 7 Bankruptcy, Chapter 13 Bankruptcy, and Chapter 11 Bankruptcy!
Many debtors, creditors, legal professionals, and others have heard of bankruptcy, but need more information to determine whether bankruptcy is the right option, and how to assert their rights after a bankruptcy is filed. This guide by an experienced bankruptcy attorney in California will assist in navigating the complex laws under the United States Bankruptcy Code. Remember that filing for bankruptcy has significant legal consequences that should only be undertaken in conjunction with the advice and counsel of an experienced bankruptcy lawyer.
Bankruptcy is a legal proceeding filed in federal court in which an individual or a business requests relief from outstanding debts. It is a court order depicting how an insolvent (unable to meet the financial obligations of their lenders) individual or business plans to repay their creditors. Upon successful discharge, a debtor will no longer be liable for most debt obligations incurred prior to filing for bankruptcy. The most common forms of bankruptcy are chapter 7 bankruptcy, chapter 13 bankruptcy, and chapter 11 bankruptcy. Essentially, bankruptcy is a legal tool that allows debtors to start fresh and learn from past financial mistakes.
The concept of bankruptcy is not new; in fact, records of debt forgiveness date back to ancient Hebrew society. The term “bankruptcy” is derived from medieval and Renaissance Italy. The Italian banca rotta translates to “broken bench,” which referred to Italian merchants who worked from a market stall or “bench.” If a merchant ran out of money and failed to pay his debts, his creditors would come and break his bench. This prevented the merchants from being able to work and visibly marked that they had failed to pay. The concept of discharging a debt did not appear in English bankruptcy law until the 1700s and the US did not pass a formal, uniform bankruptcy act until 1898. Finally, the Bankruptcy Reform Act of 1978 replaced this and became the basis for today’s United States Bankruptcy Code.
Involuntary bankruptcy is relatively rare compared to voluntary bankruptcies. In an involuntary bankruptcy, a creditor brings a bankruptcy proceeding against a person or, more commonly, a business requesting that that person or business go into bankruptcy. Creditors may file an involuntary bankruptcy case against a debtor if they believe the debtor has the ability to pay but is refusing to do so for some reason. An involuntary bankruptcy proceeding can only be filed under chapter 7 or chapter 11 of the Bankruptcy Code and is only available to qualifying creditors who have a bona fide claim against the debtor.
By far the most common form of bankruptcy is voluntary bankruptcy. Voluntary bankruptcy proceedings occur when a filer who is insolvent chooses to petition the court for bankruptcy. Filers can be either individuals or corporations who cannot pay off their debts. Voluntary bankruptcy can be an extremely useful tool to wipe the slate clean and start over.
Chapter 7 bankruptcy, also known as a liquidation bankruptcy, is the most common form of bankruptcy. In a Chapter 7 proceeding, a bankruptcy trustee, who is appointed by the United States Trustee Program to oversee a filer’s bankruptcy case, liquidates a filer’s nonexempt assets to pay creditors and any remaining debt is discharged. To be eligible to file for chapter 7 bankruptcy, the debtor must pass a means test and cannot have a discharged chapter 7 bankruptcy within the last 8 years.
Chapter 13 bankruptcy, also known as a wage earner’s plan, is a bankruptcy proceeding in which filers reorganize their finances and repay creditors under the supervision of the court. Filers are required to submit a previously agreed-upon monthly payment over a period of 3 – 5 years to a bankruptcy trustee, who then distributes it to the creditors. A trustee in a chapter 13 bankruptcy is an impartial third party who helps a debtor restructure their debts and serves as a liaison between the debtor and the creditors. A chapter 13 bankruptcy also allows homeowners to catch up on their mortgage payments and become current without losing their home.
Chapter 11 bankruptcy is the most complex and usually the most expensive form of bankruptcy. Chapter 11 bankruptcy includes both individual and business bankruptcies by allowing such people and entities to restructure their affairs, debts, and assets. The debtor, called a debtor in possession, may continue to operate but must ask the court’s permission for certain business decisions. A business may choose to file for chapter 11 bankruptcy if it needs time to restructure its debts and does not meet the qualifications for a chapter 13 bankruptcy.
Pursuant to the United States Bankruptcy Code, the following are debtor requirements for bankruptcy:
Of all the types of bankruptcy, chapter 7 has the most stringent requirements because it offers the most relief. Unlike other forms of bankruptcy, chapter 7 provides for unsecured debt, such as credit card debt or medical bills, to be wiped completely. This makes chapter 7 an attractive option for many filers so they can start anew. To file for chapter 7 bankruptcy, the filer must:
The means test is a device used by the courts as laid out in 11 U.S.C. § 707(b)(1) to limit the use of chapter 7 bankruptcies to those who are unable to pay their debts. The higher your disposable monthly income (total income minus certain monthly expenses), the less likely you are to qualify for chapter 7 bankruptcy. The logic behind this is that those with higher disposable monthly incomes should be able to pay back debt. The means test is broken down into several parts. First, is your income more than the median income for the same size household in California? The Federal Court’s Official Form 122A-1 can help you determine this. If you are under the median, you can petition for chapter 7 bankruptcy. If you are over the median, you must determine if you have enough disposable income to pay off some of your debts. Official Form 122A-2 can help you find out if your disposable income qualifies or eliminates you from filing for chapter 7 bankruptcy. If you do, the case may be converted to chapter 13 bankruptcy or dismissed.
There are exceptions to the means test for non-consumer debtors . If your debts are not primarily consumer debts (i.e. your debt mostly consists of business debt), this qualifies as an exception to the means test. Additionally, if you are a disabled veteran who incurred debts mostly while on active duty or while performing a homeland defense activity or if you are a Reservist or member of the National Guard called to active duty before filing your case these can qualify as exceptions to the means test. See Official Form 122A-1Supp for these exceptions.
The requirements for a chapter 13 bankruptcy are similar to those of a chapter 7 bankruptcy, but instead proof that you will be able to repay creditors is required. To file a chapter 13 bankruptcy, a filer must:
Filing for the correct type of bankruptcy to fit your unique financial situation is arguably as important as deciding whether or not to file for bankruptcy in the first place. Remember that there are eligibility requirements for each type of bankruptcy and that filing for the wrong type of bankruptcy can have various negative consequences, such as case dismissal, restriction from filing another bankruptcy petition, and a decreased length for an automatic stay on following bankruptcy filings. Review your situation carefully, preferably with an experienced bankruptcy attorney, and be sure to include all pertinent documents in your evaluation. Refer to the chart below for a brief comparison between chapter 7 bankruptcy, chapter 13 bankruptcy, and chapter 11 bankruptcy that should be used in consultation with a bankruptcy attorney. Note that the cost references the amount paid to the court. Of course, a bankruptcy attorney will cost you more.
Pursuant to 11 U.S.C. § 362, an automatic stay is issued upon the filing of the bankruptcy. An automatic stay is a temporary injunction preventing creditors from pursuing debts. The minute a bankruptcy petition is filed, the automatic stay begins. It will likely last through the entire bankruptcy but depends on whether the collection activity is directed toward the debtor or the property. It is also worth noting that an automatic stay will cease if the bankruptcy case is dismissed. The automatic stay halts creditors from starting pursuing court proceedings against the debtor, foreclosing on a debtor’s home, creating or enforcing a lien against the debtor’s property, and attempting to repossess collateral (such as a vehicle). It also temporarily prevents utility disconnections and evictions. An automatic stay requires creditors to halt collections unless the creditor is granted relief from the stay. The automatic stay will end in a shorter time for repeat bankruptcy filing. Note: an automatic stay cannot protect against certain tax debts, child support, alimony, and loans from pensions.
A bankruptcy trustee is an impartial third party who is appointed by the US Trustee Program to oversee the bankruptcy estate (that is, the debtor’s non-exempt property). A trustee in a chapter 7 bankruptcy case will be in charge of liquidating the bankruptcy estate, including gathering the debtor’s property, selling the bankruptcy estate’s property, and distributing the proceeds to creditors. By contrast, a trustee in a chapter 13 bankruptcy case is in charge of reviewing the payment plan, receiving payments from the debtor, and distributing these payments to the creditors.
Chapter 7: chapter 7 bankruptcy case usually lasts between 2 and 5 months from initial credit counseling course to discharge for the vast majority of cases, notably the no-asset cases. It may take longer depending on if you need to provide more documents, the bankruptcy trustee has to sell your property, or if you are involved in a bankruptcy-related lawsuit.
Chapter 13: Because chapter 13 bankruptcy requires repayment over time, it will take significantly longer than a chapter 7 bankruptcy. Typically, a chapter 13 bankruptcy takes 60 months. It is possible to repay debts earlier if you propose a 100% plan. A 100% plan requires that the filer pays all unsecured debts (such as credit card bills or medical bills) in full and leave only long term debts to be paid, such as mortgages or student loans.
Chapter 11: chapter 11 bankruptcies usually last between 6 months and 2 years, but due to the complicated nature of these filings, it is not uncommon for them to last even longer.
Immediately upon filing for bankruptcy, the automatic stay begins. Creditors cannot call or try to collect payment for debts and wage garnishments stop.
Next, filers will likely see a drop in their credit score. Between a 100 and 200 point drop is to be expected after filing for bankruptcy. On the bright side, they can immediately start improving their credit score once the bankruptcy case is discharged. Many filers already have low scores due to missed payments, so elimination of credit card debt because of a bankruptcy discharge puts them in a much better position to pay off their credit cards. Additionally, they have do not have any missed payments and their balance is now $0. Many debtors are able to rebuild their credit within 1-2 years of receiving a discharge. Keep in mind that a chapter 7 bankruptcy will stay on a credit report for up to 10 years after filing and a chapter 13 bankruptcy will remain on a credit report for up to 7 years after filing.
Finally, they will need to prepare bankruptcy paperwork and attend a credit counseling course. Once this is complete, they can file for bankruptcy.
All bankruptcy filings require the filer to attend initial credit counseling meeting. The counseling fee is usually around $50, but may be waived if the filer’s income is low enough. Debtor education courses are also required later on in the bankruptcy process and cost between $50 – $100.
The filing fee is $335 for a chapter 7 bankruptcy, $310 for chapter 13 bankruptcy, and $1,717 for a chapter 11 bankruptcy. Of course, attorneys will charge fees for their time on top of this amount.
Filing fees may be paid in installments. 28 U.S.C. § 1930; and Fed. R. Bankr. P. 1006(b). Or, if the debtor’s income is less than 150% of the poverty level, the fee may be waived entirely pursuant to 28 U.S. Code § 1930. Failure to pay the court filing fee may result in a case dismissal. 11 U.S.C. § 707(a).
If you plan on hiring an attorney, there will also be attorney’s fees involved in your bankruptcy case. We highly recommend you hire a bankruptcy attorney instead of attempting to represent yourself pro se (without a lawyer). Without the knowledge of an experienced bankruptcy attorney, filers can lose income or property worth much more than attorney’s fees.
A Debtor in Possession (DIP) is a person or corporation who has filed for chapter 11 bankruptcy but still has property in which creditors have a legal claim, usually a lien or other security interest. A DIP may continue to do business but must ask the court for permission for certain business activities outside of the scope of regular business activities. Typically, a DIP is a transitional stage that allows the debtor to retain some value to their assets after bankruptcy. The assets are commonly part of the business and have a higher resale value together with the business than alone. DIP status also allows debtors to prevent liquidation or other sales that would under-value their assets.
A bankruptcy dismissal closes a bankruptcy case before discharge. A debtor is still liable for all debts and the automatic stay is lost if a bankruptcy case is dismissed. Refer to our post on bankruptcy dismissal for a more comprehensive explanation of bankruptcy dismissal.
A bankruptcy conversion is a court-approved change from one chapter of bankruptcy to another chapter. Our blog post on bankruptcy conversions provides a more in depth explanation of bankruptcy conversions.
Unsecured debt is a loan that is not backed by collateral; that is, a loan that is not backed by underlying assets. These loans usually have higher interest rates and are riskier to lenders if a borrower defaults on payment. Common examples of unsecured debt are credit card bills, medical bills, and utility bills.
Unlike unsecured debt, secured debt is a loan that is backed by collateral. These loans are considered less risky because an asset backing this debt is a form of security. If a borrower defaults on the loan, the bank can repossess the collateral, sell it, and use the proceeds to pay back the debt. The two most common examples of secured debt are home mortgages and auto loans.
Similar to the above definitions, an unsecured creditor is a creditor or lender that issues a loan without obtaining specific assets or collateral and a secured creditor is a creditor or lender that issues credit that is backed by collateral. While a secured creditor can repossess assets to pay off a debt, an unsecured creditor may have to use litigation or bankruptcy proceedings to obtain repayment.
A judicial lien is created when a creditor records a judgment to the court asking the court to impose a lien on the debtor’s property. If the debtor has not satisfied the judgment, the judicial lien will remain on the property. In both chapter 7 bankruptcy and chapter 13 bankruptcy, a debtor may file a Motion to Avoid Judicial Lien. If this is granted by the court, the judgment creditor will no longer have a lien on your home. In a chapter 7 bankruptcy, an Order Avoiding Judicial Lien will remove the debt completely. Even nondischargeable judgments can be removed if they impair an exemption in bankruptcy.
A liquidation occurs in a chapter 7 bankruptcy and sometimes a chapter 11 bankruptcy when a bankruptcy trustee (or, in the case of a chapter 11 bankruptcy, a debtor in possession) sells nonexempt assets to pay off creditors. Keep in mind that exempt property as defined by 11 U.S.C. § 522 will not be liquidated. The newly updated and increased California homestead exemption allows most chapter 7 bankruptcy filers to keep their homes. For a more detailed explanation of the homestead exemption, you can read our Ultimate Guide to the Homestead Exemption in California. For a complete list of exemptions in bankruptcy, refer to CCP § 704.
Unlike a liquidation, a trustee will not sell your nonexempt property under chapter 11 or chapter 13 bankruptcy. Instead, you will be required to pay off certain debts in full. Nonexempt assets must be paid by either disposable income or an amount equal to the value of the nonexempt assets (whichever is higher). This may dramatically increase monthly payments through your repayment plan.
Those who filed for chapter 13 or chapter 11 bankruptcy are able to keep their cars as long as they continue to make payments. However, in a chapter 7 bankruptcy, it may be more difficult to keep a car. A document called a Statement of Intent is one of the many documents that will be filed among the bankruptcy paperwork. This form alerts the court what filers plan on doing with property that is securing a debt they owe, like a car with a loan that has not yet been paid off. They can chose to do one of three things with this property: reaffirm the debt, surrender the vehicle, or redeem the vehicle. Reaffirming the debt allows a filer to continue to make payments while remaining in possession of the vehicle. This debt is not discharged, and the lender retains the right to repossess the vehicle if there are any missed future payments. Surrendering a vehicle allows a filer to voluntarily surrender the car for repossession. This only occurs after the automatic stay has expired and is common with filers who have high car payments they can’t afford. Finally, a filer can redeem a vehicle by paying the lender the value of the car. This may be a good option if the vehicle is worth significantly less than the total outstanding debt.
Chapter 13 and chapter 11 bankruptcy filers are usually protected from losing their homes as long as they follow the repayment plan. For chapter 7 bankruptcy, filers should find out if their home is protected from being sold by a chapter 7 trustee by calculating how much equity they can have in their house and still file for chapter 7 bankruptcy. This calculation includes California’s recent increase to the homestead exemption, which allows many more filers to keep their homes. If your result is negative, your bankruptcy will likely be seen as a “no asset” bankruptcy and you will likely be able to keep your home. If the result is positive, this is the exposed equity that you may need to pay to the trustee to be able to keep your home.
There are also options available to help prevent a bankruptcy trustee from selling your house.
In short, no; bankruptcy will not affect your 401k. Retirement accounts including a 401k and other qualified Employee Retirement Income Security Act (ERISA) accounts are not typically included in the bankruptcy estate, and will therefore not be affected by a bankruptcy filing. Additionally, both federal and state laws provide exemptions that protect retirement accounts in bankruptcy. Unless you withdraw money from the retirement account or the account is fraudulent, retirement accounts are protected from creditors in a bankruptcy filing.
A bankruptcy discharge, also known as a discharge in bankruptcy, is a permanent court order releasing a debtor from personal liability for certain specified types of debts. That is, the debtor no longer has a legal obligation to pay off debts that are discharged. An individual can be granted a chapter 7 bankruptcy discharge pursuant to 11 U.S.C. § 727. A business entity seeking a discharge must file for chapter 11 bankruptcy and is subject to the limitations of 11 U.S.C. § 1141(d)(3). Refer to our guide on bankruptcy discharge for an in-depth look at the the bankruptcy discharge process.
No two bankruptcy cases are the same; each bankruptcy case will bring with it a new set of challenges. Whether you a debtor, creditor, or other interested party, we highly recommend you consult a knowledgeable bankruptcy attorney to make the bankruptcy process as easy as possible. A bankruptcy attorney can help guide you through the complicated bankruptcy process and ensure the most favorable outcome in your case. Contact the bankruptcy attorneys at Talkov Law in California online or over the phone at (844) 4-TALKOV (825568) to schedule your free, 15 minute consultation.
Constructive Trust in California What is a Constructive Trust? A constructive trust is a remedy used by a court to compel a person who has property they are not justly entitled to to transfer it to the intended beneficiary as determined by the court. How can I get a Constructive Trust? California law provides that ... Read...
A constructive trust is a remedy used by a court to compel a person who has property they are not justly entitled to to transfer it to the intended beneficiary as determined by the court.
California law provides that a constructive trust is created where a defendant takes a property by fraud, accident, mistake, undue influence, the violation of a trust or other wrongful act. California Civil Code §§ 2223, 2224. By court order, a constructive trust imposes trustee status on the defendant. This means that they can hold the property but they can’t benefit from it.
A court creates a fictional or “constructive” trust by recognizing that legal title is held by one person (the wrongdoer) but demands the wrongdoer hold that title as a trustee of a trust created for the beneficiary–the rightful owner. The title-holder’s only duty is to give the property to the rightful owner.
The following must be shown for the court to impose a constructive trust: “(1) the existence of a res (property or some interest in property)’ (2) the right of a complaining party to that res; and (3) some wrongful acquisition or detention of the res by another party who is not entitled to it.” Communist Party v Valencia, Inc. (1995) 35 CA4th 980, 990.
Importantly, if no res exists, then there is nothing over which the complaining party can obtain a constructive trust.
Sarah withdrew $10,000 from her bank account to buy a car. Sarah put the money in an envelope in her room. Sarah’s boyfriend, Jim, finds the money and uses it to buy a motorcycle in his name. Jim has wrongfully taken and used money that belongs to Sarah. Jim no longer has the $10,000. However, Sarah can show the court that she withdrew the money from her account and that Jim took it and bought a motorcycle. Through a method called “tracing” the court can find that Jim has title to the motorcycle but must give the motorcycle to Sarah even though the $10,000 that was Sarah’s is no longer in cash form.
Importantly, if Jim had taken that motorcycle and sold it to his brother for just $5,000 and Jim’s brother thought Jim was the owner of the bike, then Sarah can no longer get a constructive trust over the motorcycle because Jim’s brother would be a bona fide purchaser. Sarah can still get a constructive trust over the proceeds (thee $5,000) from the sale of the bike from Jim to his brother. If Jim had told his brother before he sold him the motorcycle that he took Sarah’s $10,000 to buy it, then Jim’s brother would not be a bona fide purchaser and Sarah would still be able to get a constructive trust over the motorcycle.
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What is the Difference Between a Title and a Deed? If you are wondering what the difference is between a deed and title, you are not alone! The experienced Real Estate and Quiet Title Attorneys at Talkov Law break down the differences between these...
If you are wondering what the difference is between a deed and title, you are not alone. Real estate attorneys and quiet title lawyers are often asked what the difference is between the two. Although these two terms are interrelated and commonly confused, they are entirely different legal concepts with several important distinctions. So, how exactly is a title different from a deed?
A title refers to a person’s legal rights to use a property and the actual lawful ownership of the property. A title may be transferred from seller to buyer if the property is sold. Titles must also be clear in order to be sold, meaning that the owner of the property has undisputed claim of the property and it is free of all liens and encumbrances. Furthermore, a title is a conclusion or a concept rather than a physical document.
California Insurance Code § 104 explains that:
Title insurance means insuring, guaranteeing or indemnifying owners of real or personal property or the holders of liens or encumbrances thereon or others interested therein against loss or damage suffered by reason of:
(a) Liens or encumbrances on, or defects in the title to said property;
(b) Invalidity or unenforceability of any liens or encumbrances thereon; or
(c) Incorrectness of searches relating to the title to real or personal property.
Title insurance protects both lenders and homebuyers from financial loss due to defects in title. A one-time title insurance fee covers administrative costs of searching the title data. Title insurance usually covers areas such as ownership disputes, incorrect signatures (including forgery and fraud), flawed records, restrictive covenants (such as unrecorded easements), and encumbrances or judgments on the property (such as lawsuits or liens). Virtually all real estate transactions in California require title insurance.
A certificate of title is an opinion issued by a title insurance company identifying the owner(s) of property based on public records research. Bear in mind that a certificate of title is an opinion of ownership status and not a guarantee.
By contrast, a deed “is a written instrument that conveys or transfers the title to real property. It is an executed conveyance and acts as a present transfer of the property.” Miller & Starr, 3 Cal. Real Est. (4th ed.) § 8:1. In other words, a deed is a physical, legal document that must be signed by both parties. It shows a transfer of ownership when transferring title from one party to another. Deeds include a description of the property as well as naming both the grantor (seller) and grantee (buyer) of the property.
A grant deed is a legal instrument used to transfer title to real property. A grantor must follow two important guarantees, called implied covenants, when conveying an asset to a grantee:
(1) that prior to the execution of the conveyance he or she has not conveyed the same estate, or any right, title, or interest therein, to any person other than the grantee, and
(2) that such estate is, at the time of the execution of said conveyance, free from any encumbrance that is done, made, or suffered by the grantor, or any person claiming under the grantor, such as his or her agents, employees, or representatives.
Miller & Starr, 3 Cal. Real Est. (4th ed.) § 8:6.
“A grant deed is presumed to convey the grantor’s entire interest in the property conveyed, including any interest acquired by the grantor subsequent to the date of the deed.” Miller & Starr, 3 Cal. Real Est. (4th ed.) § 8:5. A grant deed must contain the name of the grantor, a legal description of the property, the name of the grantee.
A deed of trust, also known as a trust deed, is a document used in financed real estate transactions when a party has taken out a loan to purchase a property. It is an agreement between the borrower (trustor) and lender (beneficiary) to have the legal title transferred to a third party (trustee), such as a bank, escrow company, or title company, until the loan is paid off.
A warranty deed, which is the standard deed used when transferring title, provides protection for the purchase of a property. “In addition to the covenants that are implied in a grant deed, a warranty deed expressly warrants the title to the property and the quiet possession of the property to the grantee. The grantor thereby agrees to defend the premises against any unlawful claim to the title or possession of the property conveyed by any third person.” Miller & Starr, 3 Cal. Real Est. (4th ed.) § 8:12. “The modern practice of securing title insurance has virtually eliminated the warranty deed from California practice.” 12 Witkin, Summary 11th Real Prop (2020), § 269.
A general warranty deed provides the grantee with the most protection because it holds the grantor responsible for any breach of warranty, even if it occurred without the grantor’s knowledge or when the grantor did not own the property. In other words, a grantor guarantees against any defects in clear title with a general warranty deed. Most residential property transactions use a general warranty deed.
By contrast, a special warranty deed only warrants against problems or encumbrances that occurred during the grantor’s ownership. Furthermore, a special warranty deed only guarantees that the grantor owns and can sell the property and that there were no encumbrances on the property during the grantor’s ownership; there are no protections against title claims for the period of time in which the seller did not hold title to the property.
A quitclaim deed transfers to the grantee all of the right, title, and interest that the grantor had at the time the deed was executed and delivered which are capable of being conveyed by a deed. It transfers whatever interest the grantor may have in the property, whether legal or equitable, and is as effective as any other form of conveyance to transfer the grantor’s title to the grantee.
Miller & Starr, 3 Cal. Real Est. (4th ed.) § 8:13.
Indeed, a “quitclaim deed transfers only the interest that the transferor has at the time” of the conveyance. 12 Witkin, Summary 11th Real Prop (2020), § 266. A quitclaim deed conveys interest in a property “as is” without a warranty. It does not state that the grantor has ownership rights, but rather that ownership interest in the property (if any) is released to the grantee. Many quitclaim deeds are used to transfer property between trusted family members or friends due to their lack of assurances when ownership is transferred.
Lastly, the bargain and sale deed is not used in California but is still worth noting. It has similar properties to a quitclaim deed but instead indicates that the grantor has title and can transfer it, encumbrances and all. Bargain and sale deeds are commonly used in foreclosure or tax sales where the grantor has title to the property but does not guarantee that the property is free of claims.
It is important to understand that titles and deeds have different abilities and restrictions. The differences between a title and a deed, and each of the subcategories of title and deed, can drastically change how a real estate transaction is handled. If you are considering buying a house or otherwise possess real property, we highly suggest you speak with a knowledgeable real estate litigation attorney who can help further your understanding of titles and deeds.
What is a “Fraudulent” Transfer in California? A judgment is merely a piece of paper signed by a court that allows a creditor to take the debtor’s assets or to force a debtor to pay the debt from their income. Some judgment debtors, realizing that judgment collection methods will allow the creditor to take their assets, ... Read...
A judgment is merely a piece of paper signed by a court that allows a creditor to take the debtor’s assets or to force a debtor to pay the debt from their income. Some judgment debtors, realizing that judgment collection methods will allow the creditor to take their assets, decide to hide or dispose of their assets. For example, debtors may transfer their assets to relatives, friends, legal entities, simply place the assets under false names, or encumber their assets using fictional debts. The courts and legislature have long recognized that debtors may engage in such schemes. Accordingly, the Uniform Fraudulent Transfer Act provides remedies for creditors faced with this issue.
The purpose of California’s Uniform Fraudulent Transfer Act (UFTA) is to prevent debtors from handing out their assets before creditors can collect. For example, before filing for bankruptcy, a debtor may try to give his or her home or other properties to a relative, a close friend, or a business associate. A debtor might also try to sell their property at a discounted price. These types of transactions are illegal under California law, and may give rise to an action by creditors to void the transaction. This brings property back into the name of the debtor to allow the creditor to collect on their assets.
California Civil Code § 3439 et seq. reflects the current Uniform Fraudulent Transfer Act. The UFTA prohibits debtors from transferring or placing property beyond the reach of their creditors when that property should be available for the satisfaction of the creditors’ legitimate claims. A transfer under the UFTA is defined as “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset …, and includes payment of money, release, lease, and creation of a lien or other encumbrance.” Cal. Civ. Code § 3439.01(i).
There are two types of fraudulent transfers–actual fraud and constructive fraud. Actual fraud means that the debtor had the intent to defraud a creditor. Usually, a debtor who donates his or her assets, usually to an “insider” who is a friend or family member, thereby leaving nothing to pay creditors. Constructive fraud does not require proof of an actual intent to hinder or delay a creditor’s rights. Rather, it looks to the underlying financial result of the transaction to conclude whether a fraudulent transfer has occurred. For example, where the debtor was insolvent and did not receive reasonably equivalent value for the property transferred, the transfer may be deemed constructively fraudulent.
The most common allegation is that the debtor transferred assets to third parties for less than fair value for the purpose of evading the creditor. The “actual intent” referred to in California Civil Code § 3439.04(a)(1) is determined upon consideration of eleven factors showing indicia or badges of fraud in § 3439.04(b). See Filip v. Bucurenciu (2005) 129 Cal.App.4th 825, 834. Finding actual intent places the burden of proof on the party asserting the fraudulent intent and upon a showing by a preponderance of the evidence. California Civil Code § 3439.04(c).
California Civil Code § 3439.04 provides that:
(a) A transfer made or obligation incurred by a debtor is voidable as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows:
(1) With actual intent to hinder, delay, or defraud any creditor of the debtor.
(2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor either:
(A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction.
(B) Intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.
(b) In determining actual intent under paragraph (1) of subdivision (a), consideration may be given, among other factors, to any or all of the following:
(1) Whether the transfer or obligation was to an insider.
(2) Whether the debtor retained possession or control of the property transferred after the transfer.
(3) Whether the transfer or obligation was disclosed or concealed.
(4) Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.
(5) Whether the transfer was of substantially all the debtor’s assets.
(6) Whether the debtor absconded.
(7) Whether the debtor removed or concealed assets.
(8) Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.
(9) Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.
(10) Whether the transfer occurred shortly before or shortly after a substantial debt was incurred.
(11) Whether the debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor.
(c) A creditor making a claim for relief under subdivision (a) has the burden of proving the elements of the claim for relief by a preponderance of the evidence.
It is not necessary that the transferor acted for the purpose of desiring to harm his or her creditors. Rather, Economy Refining & Service Co. v. Royal Nat’l Bank (1971) 20 Cal.App.3d 434, 441, found held that the debtor’s intent to make the transfer, rather than any evil intent to harm the creditor, which sufficient o find intent to defraud.
The second type of fraudulent transfer is a constructive fraudulent transfer by which the court deems a transfer made without an intent to defraud to be avoidable on the basis that the transfer was made while the debtor was insolvent and received less than reasonable equivalent value in exchange.
Under California Civil Code § 3439.05(a): “A transfer made or obligation incurred by a debtor is voidable as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.” Subsection (b) provides that: “A creditor making a claim for relief under subdivision (a) has the burden of proving the elements of the claim for relief by a preponderance of the evidence.”
This might arise in the context of a party who gifts their property to close relatives or friends at a time where they have creditors making claims, even if three is a lack of improper motive.
The key here is that a constructively fraudulent transfer applies only to “a creditor whose claim arose before the transfer was made or the obligation was incurred.” California Civil Code § 3439.05(a). This is in contrast to the remedies for an actual fraudulent transfer which applies “to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred.” California Civil Code § 3439.04(a).
Mere intent to delay or defraud is not sufficient. Rather, the injury to the creditor must be shown affirmatively. “A well-established principle of the law of fraudulent transfers is, ‘A transfer in fraud of creditors may be attacked only by one who is injured thereby. Mere intent to delay or defraud is not sufficient; injury to the creditor must be shown affirmatively. In other words, prejudice to the plaintiff is essential.'” Berger v. Varum (2019) 35 Cal.App.5th 1013, 1020 (quoting Mehrtash v. Mehrtash (2001) 93 Cal.App.4th 75, 80). The effect of this rule is that wealthy debtors are free to transfer their assets so long as sufficient assets remain for creditors.
The UFTA is not the exclusive means by which a creditor may attack a fraudulent conveyance. “The UFTA is not the exclusive remedy by which fraudulent conveyances and transfers may be attacked. They may also be attacked by, as it were, a common law action. If and as such an action is brought, the applicable statute of limitations is section 338 (d) and, more importantly, the cause of action accrues not when the fraudulent transfer occurs but when the judgment against the debtor is secured (or maybe even later, depending upon the belated discovery issue).” Macedo v. Bosio (2001) 86 Cal.App.4th 1044, 1051. California Code of Civil Procedure § 338(d) provides a limitations period of three (3) years within which to bring a claim based on fraud. The rule is that: “An action for relief on the ground of fraud or mistake. The cause of action in that case is not deemed to have accrued until the discovery, by the aggrieved party, of the facts constituting the fraud or mistake.”
There are many different scenarios that can lead to a fraudulent transfer lawsuit other than the actions of a simple debtor and creditor. Innocent buyers thinking they were making a great investment as well as trustees and administrators may be liable for their part. Speaking with a trusted and knowledgeable fraudulent transfer attorney is the best line of defense. Alternatively, an experienced fraudulent transfer attorney is also needed if you believe you have a claim under the UFTA. Wherever you stand, the attorneys at Boyd Law Orange County know this area of law well. Contact Boyd Law today to discuss the details of your case.
Where actual intent to defraud can be shown by a creditor under California Civil Code § 3439.04(a)(1), an action must be brought within four (4) years after the transfer or conveyance was made. Or, if later, within one year of when the transfer or conveyance was or could reasonably have been discovered by the creditor. Where fraudulent intent is found under California Civil Code §§ 3439.04(a)(2)(A), (B) and 3439.05, an action must be filed within four (4) years after the transfer was made. If not, the debtor has a full defense of the statute of limitations. These statutes can be applied in bankruptcy under 11 U.S.C. § 548, despite the two year statute of limitations found in the Bankruptcy Code.
Perhaps the strongest affirmative defense for debtors is the statute of repose. Specifically, California Civil Code § 3439.09 explains that no action may be brought for fraudulent transfer or avoidable conveyance more than seven (7) years after the transfer was made notwithstanding any other provision of law. This provides a defense for even the most obvious cases. Unlike a statue of limitation, a statute of repose is not subject to any fact sensitive inquiry.
Where a creditor can show that a debtor has fraudulently transferred property, the UFTA provides several remedies under California Civil Code § 3439.07, which provides that:
(a) In an action for relief against a transfer or obligation under this chapter, a creditor, subject to the limitations in Section 3439.08, may obtain:
(1) Avoidance of the transfer or obligation to the extent necessary to satisfy the creditor’s claim.
(2) An attachment or other provisional remedy against the asset transferred or its proceeds in accordance with the procedures described in Title 6.5 (commencing with Section 481.010) of Part 2 of the Code of Civil Procedure.
(3) Subject to applicable principles of equity and in accordance with applicable rules of civil procedure, the following:
(A) An injunction against further disposition by the debtor or a transferee, or both, of the asset transferred or its proceeds.
(B) Appointment of a receiver to take charge of the asset transferred or its proceeds.
(C) Any other relief the circumstances may require.
(b) If a creditor has commenced an action on a claim against the debtor, the creditor may attach the asset transferred or its proceeds if the remedy of attachment is available in the action under applicable law and the property is subject to attachment in the hands of the transferee under applicable law.
(c) If a creditor has obtained a judgment on a claim against the debtor, the creditor may levy execution on the asset transferred or its proceeds.
(d) A creditor who is an assignee of a general assignment for the benefit of creditors, as defined in Section 493.010 of the Code of Civil Procedure, may exercise any and all of the rights and remedies specified in this section if they are available to any one or more creditors of the assignor who are beneficiaries of the assignment, and, in that event (1) only to the extent the rights or remedies are so available and (2) only for the benefit of those creditors whose rights are asserted by the assignee.
Although some transfers are voidable under California Civil Code § 3439.07, it is § 3439.08(a) that embodies the good faith exception to the voidable transfer remedy. Where a debtor transferred assets with actual fraudulent intent, pursuant to § 3439.04(a)(1), § 3439.08(a) provides that the transfer is not voidable against a person who took for reasonably equivalent value and on good faith, or against subsequent transferees. The transferee’s good faith or knowledge of the debtor’s fraudulent intent may be inferred where the transferee had “notice of such facts and circumstances as would induce an ordinarily prudent man to inquire into the purpose [of the debtor in] making the conveyance.” Boness v. Richardson Mineral Springs (1956) 141 Cal.App.2d 251, 252.
To the extent the transaction is voidable pursuant to California Civil Code § 3439.04(a)(1), a creditor may obtain judgment to recover from a party other than a good faith transferee the asset or even the value of the asset under California Civil Code § 3439.08(b). Nonetheless, where the transferee is in good faith, that transferee may retain their interest or rights in the property to the extent of the value given to the debtor for the property.
Bankruptcy is a common forum for fraudulent transfer litigation. For example, fraudulent transfers in California bankruptcy can arise under 11 USC 548. This includes Ponzi scheme fraudulent transfers in bankruptcy. In fact, creditors can even allege non-dischargeability of intentional fraudulent transfer. It is important to contact a bankruptcy attorney to consider all options.
Fraudulent transfers also rise in California family law, especially marital settlement agreements. Most notably, Mejia v. Reed found that fraudulent transfer can be raised as to transmutation (post-nuptial) agreements under California law.
Any debtor who thinks that transferring money or property to friends or family will solve their problems may not be aware of the ramifications. Indeed, this may enlarge the litigation whereby the creditor will include family and friends who were unfortunate enough to be included in the transfers. If the creditor is aggressive creditor and represented by competent legal counsel, they will end up involving family, which makes the situation even worse. It is better to consider your options under bankruptcy law, particularly since the California homestead exemption may provide a place for debtors to place their money that is supported by existing law.
Our attorneys serve clients throughout Los Angeles, Orange County, San Diego, Riverside, Palm Springs, San Bernardino, & Silicon Valley. It is important to consult a real estate attorney, business litigator, or bankruptcy attorney skilled in fraudulent transfer litigation to consider your rights. Contact our fraudulent transfer attorneys today for a free consultation at (844) 4-TALKOV (825568) or contact us online.
Will Formalities in California While many people die with a will, courts do not enforce every will. Instead, courts enforce only those wills meeting specific legal requirements. Who Can Make a Will? California Probate Code section 6100 delineates that an individual 18 years or older who is of sound mind may make a will. Will ... Read...
While many people die with a will, courts do not enforce every will. Instead, courts enforce only those wills meeting specific legal requirements.
California Probate Code section 6100 delineates that an individual 18 years or older who is of sound mind may make a will.
For a will to meet the proper formalities, California Probate Code section 6110 provides that:
(a) Except as provided in this part, a will shall be in writing and satisfy the requirements of this section.
(b) The will shall be signed by one of the following:
(1) By the testator.
(2) In the testator’s name by some other person in the testator’s presence and by the testator’s direction.
(3) By a conservator pursuant to a court order to make a will under Section 2580.
(c)(1) Except as provided in paragraph (2), the will shall be witnessed by being signed, during the testator’s lifetime, by at least two persons each of whom (A) being present at the same time, witnessed either the signing of the will or the testator’s acknowledgment of the signature or of the will and (B) understand that the instrument they sign is the testator’s will.”
If the testator had previously signed alone or in the presence of just one of the witnesses, the testator need not sign again in the presence of the two witnesses but must acknowledge their signature or will (i.e., “this is my signature/will”) in the presence of the two witnesses, both present at the same time.
Importantly, the witnesses do not have to sign in front of each other or in the presence of the testator, they just have to sign the will during the testator’s lifetime.
There are two tests in California for presence:
Now, if these listed formalities are not met, a will can still be admitted to probate under California Probate Code section 6110(c)(2) if the proponent of the will establishes by clear and convincing evidence that at the time the testator signed the will, they intended the instrument to constitute their will: “If a will was not executed in compliance with paragraph (1), the will shall be treated as if it was executed in compliance with that paragraph if the proponent of the will establishes by clear and convincing evidence that, at the time the testator signed the will, the testator intended the will to constitute the testator’s will.”
A holographic will is, in essence, a hand-written will.
California Probate Code section 6111(a) provides that: “A will that does not comply with Section 6110 is valid as a holographic will, whether or not witnessed, if the signature and the material provisions are in the handwriting of the testator.”
Subsection (c) clarifies “[a]ny statement of testamentary intent contained in a holographic will may be set forth either in the testator’s own handwriting or as part of a commercially printed form will.” Thus, statements such as “this is my will” need not be in the testator’s handwriting.
The signature of the testator must be in the handwriting of the testator and the signature may appear anywhere in the will—it need not be at the end of the will.
Simply put, material provisions are “who” gets “what.” These must be in the testator’s handwriting. For example, Joanne writes “$3,000 to my son Jim Jones.” The gift of “$3,000” is material and constitutes the “what,” and “Jim Jones” is material and constitutes the “who.”
A holographic will need not contain a date. However, if a holographic will is not dated, and another will exists with inconsistent provisions and there is doubt as to which provisions are controlling, the holographic will will be deemed invalid to “the extent of the inconsistency unless the time of its execution is established to be after the date of the execution of the other will.” California Probate Code section 6111(b).
Further, “[i]f it is established that the testator lacked testamentary capacity at any time during which the will might have been executed, the will is invalid unless it is established that it was executed at a time when the testator had testamentary capacity.” California Probate Code section 6111(b)(2). Thus, even though a date is not required for a holographic will to be valid, a lack of date can present some difficulties.
Importantly, if a will does not meet either the formal requirements or the requirements for a holographic will, it may be challenged in what is called a will contest.
Our attorneys serve clients throughout Los Angeles, Orange County, San Diego, Riverside, Palm Springs, San Bernardino, & Silicon Valley. Contact our trust, probate and estate attorneys today for a free consultation at (844) 4-TALKOV (825568) or contact us online.
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Does the Father of an Unborn Child Have Custody Rights in California? Can the Family Court Prevent a Pregnant Woman from Moving Out of State? Find Out!
Theoretically, California family law treats mothers and fathers equally, with no preference for gender when making determinations of child custody. This, however, is simply not the case when an unborn baby is at issue.
Under California law, mothers don’t have to do anything to establish their rights to their child. The law is different for fathers.
Fathers must first establish their parental rights (i.e. father’s rights), before they are entitled to make any decisions or have any say in the life of their child, or unborn child.
However, if you are concerned about the health and safety of your unborn child for reasons of drug or alcohol abuse or domestic violence issues, it is important to contact Child Protective Services or the police for help. Although you have limited rights while your child is unborn, you may be successful in protecting your unborn child once the state investigates your allegations.
Custody laws in California do not apply to unborn children. An unborn baby obviously cannot be anywhere other than the mother’s womb, so the mother technically has “custody” of the unborn child by default of biology.
There are steps a father, or someone who believes he may be the father, can take to protect his parental and custodial rights prior to birth of a baby, however. Examples of these steps are as follows:
As the father of an unborn child, your rights are limited. An unborn baby obviously cannot be anywhere other than the mother’s womb, so child custody and parenting time don’t apply until the baby is born.
That being said, fathers of unborn babies do have some rights prior to the birth. So can a father prevent the pregnant mother of his child from moving out of California?
In short, no.
In the United States, adults have a constitutional right to travel freely (i.e. move away) and the family court cannot impede that right unless another countervailing state interest is at stake – in this case, presumably the best interests of a child. However, because a court cannot adjudicate custody of an unborn baby, and a court cannot discriminate against woman because of pregnancy, no law prohibits a pregnant woman from moving out of the state where the father resides to another state.
It is not up to fathers to dictate where pregnant women live. Everyone has the fundamental right to make the decision of where to reside for him – or herself.
Obviously, a pregnant woman cannot help but dictate the geographic itinerary of the unborn child that, by biological necessity, goes where she goes. That doesn’t mean the mother wins the custody battle in the end, but it does mean she cannot be penalized for moving to another state before the baby is born.
Under the Uniform Child Custody Jurisdiction and Enforcement Act (UCCJEA), the state with jurisdiction over a child under 6 months old is the state in which the child was born.
Thus, a pregnant woman who does not wish to litigate child custody in the state where the father lives appears to have the unbridled right to move anywhere else and have child custody determined in the jurisdiction where she lives at the time of the child’s birth.
California’s family law procedures are complex and trying to navigate them without help of a California family lawyer can be frustrating. If you have questions about family law procedures, contact our accomplished and dedicated family law, divorce, and child custody lawyers by calling (844) 4-TALKOV (825568) or contact us online for a free consultation with our experienced family law attorney, Colleen Sparks, who can guide you through the court process in a prompt and clear manner.
Our knowledgeable attorneys can also help if you have questions about any of the following:
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