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Discharge of Your Debts: THE Goal of Bankruptcy

Posted by Kevin on June 15, 2017 under Bankruptcy Blog | Comments are off for this article

 Bankruptcy is about Discharge

The point of bankruptcy is to get you a fresh financial start through the legal discharge of your debts.

Both kinds of consumer bankruptcy—Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts”—can discharge debts.

This blog post focuses on Chapter 7 discharge of debts.

What Debts Get Discharged?

Is there a simple way of knowing what debts will and will not be discharged in a Chapter 7 case?

Yes and no.

We CAN give you a list of the categories of debts that can’t, or might not, be discharged (see below). But some of those categories are not always clear which situations they include and which they don’t. Sometimes whether a debt is discharged or not depends on whether the creditor challenges the discharge of the debt, on how hard it fights for this, and then on how a judge might rule.

Why Can’t It Be Simpler?

Laws in general are often not straightforward, both because life can get complicated and because laws are usually compromises between competing interests. Bankruptcy laws, and those about which debts can be discharged, are the result of a constant political tug of war between creditors and debtors. There have been lots of compromises, which has resulted in a bunch of hair-splitting laws.

Rules of Thumb

Here are the basics:

#1:  All debts are discharged, EXCEPT those that fit within a specified exception.

#2:  There are quite a few of exceptions, and they may sound like they exclude many kinds of debts from being discharged. It may also seem like it’s hard to know if you will be able to discharge all your debts. But it’s almost always much easier than all that. As long as you are thorough and candid with your attorney, he or she will almost always be able to tell you whether you have any debts that will not, or may not, be discharged. Most of the time there are no surprises.

#3:  Some types of debts are never discharged. Examples are child or spousal support, criminal fines and fees, and withholding taxes.

#4:  Some other types of debts are never discharged, but only if the debt at issue fits certain conditions. An example is income tax, with the discharge of a particular tax debt depending on conditions like how long ago those taxes were due and when its tax return was received by the taxing authority.

#5:  Some debts are discharged, unless timely challenged by the creditor, followed by a judge’s ruling that the debt met certain conditions involving fraud, misrepresentation, larceny, embezzlement, or intentional injury to person or property.

#6:  A few debts can’t be discharged in Chapter 7, BUT can be in Chapter 13. An example is an obligation arising out of a divorce other than support (which  can never be discharged).

The Bottom Line

#1: For most people the debts they want to discharge WILL be discharged. #2: An experienced bankruptcy attorney will usually be able to predict whether all of your debts will be discharged. #3: If you have debts that can’t be discharged, Chapter 13 is often a decent way to keep those under control.

 

Why Can’t a Creditor Chase You After Your Bankruptcy Discharge?

Posted by Kevin on June 7, 2017 under Bankruptcy Blog | Comments are off for this article

Chasing a Discharged Debt is a Violation of Federal Law

The Bankruptcy Code makes it perfectly clear that for a creditor to try to collect on a debt after it is discharged under either Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts” is illegal. Section 524 of the Bankruptcy Code is about the legal effect of a discharge of debt. Subsection (a)(2) of that section says that a discharge of debts in a bankruptcy “operates as an injunction against” any acts to collect debts included in that bankruptcy case. Acts explicitly stated as illegal include:

the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor.

In other words, the creditor can’t start or continue a lawsuit or any legal procedure against you, and can’t act in any other way to collect the debt.

What If a Creditor Violates This Injunction?

Nowhere in Section 524 of the Code does it say anything about what happens if a creditor violates the law by disregarding that injunction. The section does not clearly say what, if anything, the penalties are for a creditor caught doing so.

However, even though no penalties are specified in THAT section, there is a strong consensus among courts all over the country that bankruptcy courts can penalize creditors for violating the discharge injunction through another section of the Bankruptcy Code, Section 105, titled “Power of Court.” The idea is that the injunction against pursuing a discharged debt is a court order, and so a creditor violating it is in contempt of court. So the usual penalties for those who act in civil contempt of court apply.

Penalties Assessed Against Violating Creditors

These penalties for civil contempt can include “compensatory” damages and “punitive” damages.

Compensatory damages are intended to compensate you for harm you suffered because of the creditor’s violation of the injunction. These potentially include actual damages such as time lost from work or other financial losses, emotional distress caused by the illegal action against you, and attorney fees and costs you’ve incurred as a result.

Punitive damages are to punish the creditor for its illegal behavior. So the judge looks at how bad the creditor’s behavior was in determining whether punitive damages are appropriate and how much to award.

Conclusion

The vast majority of the time creditors in a bankruptcy case write the debts off their books and you never hear about those debts again. But even though it’s illegal for creditors to try to collect on a debt that’s been legally written off in bankruptcy, once in a while they do try. Some creditors don’t keep good records or simply aren’t all that serious about following the law.

So after you receive your bankruptcy discharge, if you hear from one of your old creditors trying to collect its debt contact your attorney right away.  This needs immediate attention. If the creditor’s behavior is particularly egregious, you and your attorney should discuss whether to strike back at the creditor for violating the law. There might possibly even be some money in it for you.

 

The After-Christmas Bankruptcy

Posted by Kevin on December 27, 2014 under Bankruptcy Blog | Comments are off for this article

It’s human nature to hold off filing bankruptcy until after the holidays. Here’s what you need to know once you think again about filing.

The Quietest Time of the Year

For most bankruptcy attorneys December is the quietest time of the year. Because:

  • people understandably want to focus on family and friends, instead of on their financial troubles;
  • the materialism of the season discourages people from taking a realistic view of their finances;
  • many mortgage companies ease off on foreclosures, and other creditors and collection agencies back off their collections, during this season, to avoid looking like Scrooges;
  • people don’t have time to see an attorney—especially about bankruptcy–with everything they have to get done for the holidays; and
  • no one has the emotional space to go talk with an attorney about messy personal finances during this already emotionally taxing time of the year.

Things to Keep in Mind Starting December 26

After getting through the holidays, and with the time for New Year’s resolutions approaching, one of your likely resolutions is to defeat your debts once and for all. If you are considering bankruptcy as one possible way to meet that resolution, be aware of the following after-Christmas, turn-of-the-year issues:

  1. Some debts ( cash advances on your credit card or purchase of luxury items) you rang up during the few months before filing bankruptcy—to buy holiday gifts or pay for holiday expenses, for example–might not be discharged (legally erased). That depends on some nitty-gritty details of your use of credit, as well as your intentions at the time.
  2. If you are going to owe income taxes for the 2014 tax year and  expect to be filing your bankruptcy case soon after the turn of the year, that 2014 tax debt presents both some challenges and opportunities. Oddly, sometimes that debt can be paid in effect without costing you anything.
  3. A holiday bonus from your employer or a cash gift from a well-meaning relative can increase your “income” for purposes of the “means test,” either making qualifying for Chapter 7 more difficult or potentially turning your 3-year Chapter 13 case into a 5-year one. These major financial disadvantages can often be avoided through smart timing.

If you understand how bankruptcy works, these potentially troublesome issues can be turned to your advantage. The next  blogs will show you how.

Defeating Creditors’ Accusations That You Misused Their Credit to Pay for the Holidays

Posted by Kevin on April 7, 2014 under Bankruptcy Blog | Comments are off for this article

The risk that creditors will not allow you to discharge some of their debts can be minimized through smart timing of your bankruptcy.

One of the most basic principles of bankruptcy is that honest debtors get relief from their debts, dishonest ones don’t. One way you can be “dishonest” in the eyes of the bankruptcy law is to use credit when, at that point in time, you don’t intend to pay it back. That makes sense. Each time you sign a promissory note or use a credit card you are directly stating in writing, or else strongly implying, that you promise to pay the debt you are then creating. That makes moral common sense. And it’s the law: a creditor can challenge your ability to write off a debt that you did not intend to pay when you incurred it.

Creditors Have the Burden of Showing Dishonest Intent

But most of the time when a person takes out a loan or uses a credit card, they DO intend to pay the debt. The law respects that reality by holding that most debts are discharged (legally written off) unless the creditor can prove to the court that the debtor had bad intentions when incurring the debt. So, for example, if a person completes a credit application with inaccurate information, for the creditor to successfully challenge the discharge of that debt it would not only have to show this inaccuracy was “materially false,” but also that the person provided that information “with intent to deceive” the creditor. See Section 523(a)(2)(B) of the Bankruptcy Code.

Dishonest Intent Inferred from When You Incurred the Debt

However, in the delicate balancing act between the rights of debtors and creditors, the law also recognizes that it’s quite hard to prove an “intent to deceive.” So the Bankruptcy Code gives creditors a significant, although limited, advantage when consumer purchases or cash advances are made within a short period of time before the bankruptcy filing. A debtor’s use of consumer credit during that period is presumed to have been done with the intent not to pay the debt, on the theory that the person likely was considering filing bankruptcy at the time, and likely wasn’t planning on paying back that new bit of debt. So the statute says that this new portion of the debt is “presumed to be nondischargeable.”

Limitations on the “Presumption of Fraud”

This presumption is limited in lots of ways:

  • Applies only to consumer debt, not debts incurred for business purposes.
  • Covers only two narrow situations:
    • 1) cash advances totaling more than $750 from a single creditor made within 70 days before filing bankruptcy;
    • 2) purchases totaling more than $500 from a single creditor made within 90 days before filing bankruptcy, IF those purchases were for “luxury goods or services,” defined rather broadly as anything not “reasonably necessary for the support or maintenance of the debtor or a dependent.”
  • The debtor can override the presumption by convincing the court—by personal testimony and/or other facts—that he or she DID, at the time, intend to pay the debt.

So there is no presumption of fraud, and no presumption of nondischargeability of the debt, if cash advances from any one creditor add up to $750 or less within the 70-day period, or if credit purchases for non-necessities from any one creditor add up to $500 or less within the 90 days. See Section 523(a)(2)(C). This means that one simple way to avoid the presumption is to wait until enough time has passed before filing bankruptcy so that you get beyond these 70- and 90-day periods. That is, this is easy unless you have some urgent need to file the case.  Either way, your attorney will help determine when you should file your case.

Possible Creditor Challenge Even Outside the Presumption

With all this focus on the presumption, be sure to understand that even if your use of credit doesn’t fit within the narrow conditions for the “presumption of nondischargeability,” a creditor could still believe that the facts show that you did not intend to repay a debt, or that you incurred the debt dishonestly in some way. However, these kinds of challenges are relatively rare because:

  • As stated above, the creditor has the burden of proof, and it’s not easy for it to prove your bad intention;
  • The creditor can spend a lot of money on its attorney fees to make the challenge, with a big risk that the debts will just be discharged anyway; and
  • The creditor may also be required to pay YOUR attorney fees in defending the challenge if it loses. See Section 523(d).

The Honest Christmas

Posted by Kevin on December 23, 2013 under Bankruptcy Blog | Be the First to Comment

Your abundant love for your children, spouse, and others is not defined by an (over)abundance of holiday gifts.


If your everyday life is one of constant financial pressure, then the holidays are especially tough on you. If you still have any room on your credit cards or any other kind of credit, it is so difficult to not use that credit for gifts and holiday celebrations.

That’s especially true if you have children. Every ounce of your parenthood is pushing you to create a happy and memorable Christmas for them. You know you can’t afford to add to your debt and you hate to do it, but there just isn’t nearly enough in the regular paycheck to pay for it. After all, you sure can’t do without a Christmas tree, or without the family feast that’s been the tradition forever. And of course the kids need at least a few decent gifts—they don’t deserve a miserable holiday. Nor does your spouse or other special person.

All true. It is necessary and appropriate to celebrate. To enjoy our precious times of togetherness.

It’s easy for others to tell you not to use your credit cards, but they’re not in your shoes.

Sure, real love is not dependent on the monetary value of gifts, and yet love yearns to be expressed through the giving of gifts.

Everybody knows that they should live within their means, buy non-necessities like gifts only out of their spare income, and save up over the rest of the year for holiday gifts. But sometimes this is all virtually impossible.

We know that we should not judge our own worth—as a parent, spouse, or friend—by the price tag of the gifts we give to our loved ones. And yet we DO feel inadequate if we can’t give them “enough.”

So what’s a financially stressed person to do?

We grudgingly admit that we should have age-appropriate conversations with our children about the true meaning of the holidays, and about the appropriate role of gifts. We know that we should have similar honest conversations with our spouses and other adults we share a home with. At least a part of us accepts that more than anything we need to be honest—again in an age-appropriate way—with both the adults and the children in our lives about our financial limitations. We need to communicate clearly that our abundant love for them is not bound up in abundant gifts. And certainly not in overabundant gifts.

It takes serious bravery to have these conversations. And it all starts with what might be the bravest step of all: a good honest conversation with yourself about all this. You know you are in a vicious cycle of debt, and don’t see any way out. The last thing you need to do is add to your financial pressure. Instead, face your situation. Be completely honest with yourself about where you stand. Be honest about your fears. About how you don’t see a way out. Recognize that that there IS a way out. Then think about what concrete steps you can take to find the best way. Think about where you can find out some answers (such as the phone number on this website).

As you get honest with yourself, get honest with the people you love. Celebrate your love and friendship in a less material but more meaningful way. Celebrate true to the season.