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Bankruptcy Helps with Debt Problems Even without Writing off Every Debt

Posted by Kevin on September 14, 2019 under Bankruptcy Blog | Comments are off for this article

Neglecting Bankruptcy as an Option

If you have a debt that you have heard cannot be discharged (legally written off), you may not be seriously considering bankruptcy as an option. You probably have not seen a bankruptcy attorney. That could well be a mistake.

Getting the Law Right

But whether or not a specific debt can be discharged, you would be wise to get legal advice about it, for the following 4 reasons:

1. Some debts that can’t be discharged now perhaps can be in the future. Almost all income taxes can be discharged after a series of conditions have been met, which mostly just involve the passage of enough time. So your attorney can create a game plan for you using the tax timing rules to discharge as much tax debt as possible. Timing can also be important with student loans, especially if you have a worsening medical condition or are getting close to retirement age, making for a better argument of “undue hardship.”

2. Even if you can’t discharge a particular debt, bankruptcy can permanently solve an aggressive collection problem.  Often your biggest problem is how aggressively a debt is being collected. For example, you may want to pay your back child support (which is not dischargeable) but the state support enforcement agency is threatening to suspend your driver’s and/or occupational license.  The filing of a bankruptcy triggers the automatic stay which will stop collection efforts during the term of the bankruptcy or until the Court vacates the stay for just cause.  A Chapter 13 case then will allow you the time (3 to 5 years) to catch up on the back support payments based on your budget.

3. Bankruptcy can stop the adding of interest, penalties, and other costs, allowing you to pay off a debt much faster. Unpaid income taxes and certain other kinds of debts take more time to pay off because a part of each payment goes to the ongoing interest and penalties. Certain tax penalties in particular can be large. Most of these additions to the debt are stopped by a Chapter 13 filing, allowing you to become debt-free sooner and by paying less money.

4. Bankruptcy allows you to focus on paying off the debt(s) that you can’t discharge by discharging those you can. You may have a debt or two that can’t be discharged, but you likely also owe a set of debts that can be. Even if bankruptcy can’t solve your entire debt problem by simply discharging all you debts, as long as you can discharge most of your debts that would likely make your remaining debt problem much more manageable.

Conclusion

So don’t let the fact that you’ve heard that you have a debt or two that can’t be discharged in bankruptcy stop you from getting legal advice about it. Your financial life could well still be greatly improved through one of the bankruptcy options.

 

What Happens to Most of Your Debts in Chapter 7 “Straight Bankruptcy”?

Posted by Kevin on September 1, 2019 under Bankruptcy Blog | Comments are off for this article

First, let’s review the different types of debts in bankruptcy.

Secured debts are collateralized usually by your home, your car or your truck, maybe your furniture and appliances. Priority debts are ones that are usually not secured but are favored in various ways in the bankruptcy law. For most consumer debtors, they include child and spousal support, and certain taxes.

The remaining debts are called general unsecured debts.   Think credit cards and medical bills.   What do all these debts have in common-no collateral attached to these debts and not given a favored (priority) position under the law.

In most Chapter 7 bankruptcies, the vast majority of debts are general unsecured debts.  In Chapter 7 bankruptcy, most general unsecured debts are legally, permanently written off.  The legal term is “discharged”.  That means that once they are discharged—usually about 3-4 months after your case is filed—the creditors can take absolutely no steps to collect those debts.

The only way general unsecured debts can be paid anything is if either 1) the debt is NOT dischargeable or 2) it is paid (in part or in full) through an asset distribution in your Chapter 7 case.

 1) “Dischargeability”

A creditor can dispute your ability to get a discharge of your debt.  In the rare case that the discharge of one of your debts is challenged, you may have to pay that particular debt. That depends on whether the creditor is able to establish that the facts fit within the  narrow grounds for an exception to dischargeability.  This usually involving allegations of fraud, misrepresentation or other similar bad behavior on your part. If the creditor fails to establish the necessary grounds, the debt is discharged.

There are also some general unsecured debts that are not discharged unless you convince the court that they should be, such as student loans. The grounds for discharging student loans are quite difficult to establish.  Check /http://studentdebtnj.com/ for more detailed information relating to your student loans.

2) Asset Distribution

In order for a debtor to get a fresh start, the Bankruptcy Code allows a debtor to exempt certain property.  That means you keep that property.  If everything you own is exempt, or protected, then your Chapter 7 trustee will not take any of your assets from you. This is what usually happens—you’ll hear it referred to as a “no asset” case. But if the trustee DOES take possession of any of your assets for distribution to your creditors—an “asset case”— your “general unsecured creditors” may receive some of it. The trustee must first pay off any of your priority debts, as well as pay the trustee’s own fees and costs.  Whatever remains goes to the unsecured creditors on a pro rata basis.

Conclusion

In most Chapter 7 cases your general unsecured debts will all be discharged and, most of the time, general unsecured creditors will receive nothing from you.  Rarely, a creditor may challenge the discharge of its debt.  If the creditor is successful, you will still owe that debt after the close of the bankruptcy.  And if you have an “asset case,” the trustee may pay a part, or in extremely rare cases, all of the general unsecured debts, but only after paying all priority debts and his or her fees and costs.

Business Litigation that Continues After You File Bankruptcy

Posted by Kevin on August 6, 2019 under Bankruptcy Blog | Comments are off for this article

Lawsuits against You that Bankruptcy Ends

Many legal claims against you or your closed or closing business are resolved by the filing of your bankruptcy case. They are resolved either legally or practically, or both.

Claims that are legally resolved by your filing of bankruptcy are those intended to make you pay money.  The discharge (the legal write-off) in bankruptcy of whatever debt you owe will usually result in you not needing to pay anything on the claim under Chapter 7 “straight bankruptcy.” There’s not much point to a lawsuit to determine whether you owe money or about how much you owe if any such debt will just get discharged in bankruptcy.

Lawsuits that Bankruptcy Does NOT End

However, there are certain types of debts that would still need to be resolved by a court. In these situations the creditor would likely get permission from the bankruptcy judge to start a lawsuit or to continue one already started. Here are three types that need court resolution.

1) Determining the Amount of a Debt

If a debt is being discharged in a no-asset Chapter 7 case—one in which all assets of the debtor are “exempt” and protected—then, as indicated above, the amount of that debt makes no practical difference. Whatever the amount of the debt, it is getting discharged without payment of anything towards that debt.

But in an asset Chapter 7 case, in which the bankruptcy trustee is anticipating a pro rata distribution of the proceeds of the sale of assets, the amounts legally owed on all the debts need to be known for that distribution to be fair to all the creditors.  That’s because the established amount of any single debt affects the amounts received by all the creditors. So litigation to determine the validity or amount of a debt needs to be completed, even if by a relatively quick settlement.

2) Possible Insurance Coverage of the Debt

If a claim against a debtor may be covered by insurance, then the affected parties likely want the dispute to be resolved legally.

That’s because a court needs to determine 1) whether the debtor is liable for damages, 2) whether those damages are covered by the insurance, and 3) whether the policy dollar limits are enough to cover all the damages or instead leave the debtor personally liable for a portion. The following types of business litigation tend to involve insurance coverage issues:

  • vehicle accidents involving the business’ employees or owners, especially those with the complication of multiple drivers (and thus, multiple possible insurance coverages)
  • claims on business equipment damaged by fire or flood, or stolen

In these situations the bankruptcy court will likely give permission for the litigation to continue outside of bankruptcy court, while not allowing the creditor to pursue the debtor as to any amount not covered by the insurance policy limits.

3) Nondischargeable Debts

Some of the biggest fights about business-related debts occur when a creditor argues that its debt should not be discharged in the bankruptcy case.  The grounds for objecting to discharge are quite narrow—in general the debtor must have defrauded the creditor, embezzled or stolen from the creditor, or intentionally and maliciously hurt the creditor or its property.

Also, and much more prevalent in the last few years, are student loan debts.  Since the average student loan debt for an undergraduate is zeroing in on $40,000, litigation over whether the student loan debt is dischargeable, is become much more commonplace.

You Can Write Off Some Income Taxes with Bankruptcy

Posted by Andy Toth-Fejel on November 11, 2018 under Bankruptcy Blog | Be the First to Comment

Chapter 7 vs. 13 for Income Taxes

Thinking that the only way to handle your income tax debts in bankruptcy is through Chapter 13 is a misunderstanding of the law. It’s an offshoot on the broader error that you can’t write off taxes in a bankruptcy.

Both are understandable mistakes.

It is true that some taxes cannot be discharged (legally written off) in bankruptcy. But some can.

And it is true that Chapter 13 can be the best way to solve many income tax problems. But that does not necessarily mean it is the best for you. Chapter 7 might be better.

When Chapter 13 Is Better

Chapter 13 tends to be the better option if you owe a string of income tax debts, and especially if some are relatively recent ones. That’s because in these situations Chapter 13 solves two huge problems in one package.

First, if you owe recent income taxes which cannot be discharged, you are allowed to pay those taxes over the term of your Chapter 13 plan (up to 60 months) usually avoiding most penalties and interest that would have accrued during the term of the plan. That can be a huge savings.  Moreover, you can often hold off on paying anything towards the back taxes while you first pay even more important debts—such as back child support.

Second, if you have older back taxes, under Chapter 13, you pay these taxes as general unsecured debt under your plan.   If you complete all payments under your plan and otherwise satisfy the requirements of Chapter 13  any remaining older taxes are discharged; i.e., wiped out.

When Chapter 7 is Better

But you don’t need the Chapter 13 package if all or most of your income tax debts are dischargeable. In that situation, the generally much simpler Chapter 7 could be enough.

So, what makes an income tax debt dischargeable under Chapter 7?

The Conditions for Discharging Income Taxes

To discharge an income tax debt in a Chapter 7 case, it must meet these conditions:

1) 3 years since tax return due: The tax return for the pertinent tax must have been due more than three years before you file your Chapter 7 case. Also, if you requested any extensions for filing the applicable tax returns, add that extra time to this three-year period.

2) 2 years since tax return actually filed: Regardless when the tax return was due, you must have filed at least two years before your bankruptcy is filed in court.

3) 240 days since “assessment”: The taxing authority must have assessed the tax more than 240 days before the bankruptcy filing.

4) Fraudulent tax returns and tax evasion: You cannot file a “fraudulent return” or “willfully attempt in any manner to evade or defeat such tax.”

These four conditions and the procedure for utilizing them are a bit complicated.  Therefore, we advise that you retain an experienced bankruptcy attorney to assist you.

Business Disputes that Follow You Into Your Bankruptcy Case

Posted by Kevin on September 7, 2018 under Bankruptcy Blog | Comments are off for this article

A creditor can challenge the discharge of its debt in bankruptcy.

Why Creditor Challenges Are More Common in Closed-Business Bankruptcies

For the following reasons, creditors tend to object more to the discharge of their debts in bankruptcy cases that are filed after the debtor has operated and closed a business:

  • The amount of debt owed in business bankruptcies tends to be larger than in a  consumer case, making objection more tempting to the creditor.
  • In the business context some debtor-creditor relationships can be very personal.  Consider debts between former business-partners who are blaming each other for the failure of the business, or between a business owner and the business’ primary investor who believes the owner drove the business into the ground, or between the contract buyer of a business and its seller in which the buyer feels that the seller misrepresented the profitability of the business. In these situations the aggrieved creditor is more personally motivated to fight the discharge of its debt.
  • The owners of businesses in trouble find themselves desperate to keep their businesses afloat. So they may make questionable decisions which then expose them to objections to discharge.
  • In the kinds of close creditor-debtor relationships mentioned above, the creditor often has hints about the business owner’s questionable behavior, and so is more likely to believe it has the legally necessary grounds to object.

But Objections to Discharge Are Still Not Very Common

When former business owners hear that any creditor can raise objections to the discharge of its debt, they figure an objection would very likely be raised in their case. But in reality these objections occur much less frequently than might be expected, for the following reasons:

  • The legal grounds under which challenges to discharge must be raised are quite narrow. To be successful a creditor has to prove that the debtor engaged in rather egregious behavior, such as fraud in incurring the debt, embezzlement, larceny, fraud as a fiduciary, or intentional and malicious injury to property. These are not easy to prove.
  • In his or her bankruptcy case the debtor files, under oath, papers containing quite extensive information about his or her finances. The debtor is also subject to questioning by the creditors about that information and about anything else relevant to the discharge of his or her debts. If the information on the sworn documents or gleaned from any questioning reveals that the debtor truly has no assets worth pursuing, a rational creditor will often decide not to throw “good money after bad” by raising an objection.

Conclusion

In a closed-business bankruptcy case there are these two opposing tendencies. Challenges to discharge are more likely, especially by certain kinds of closely related creditors. But these challenges are still relatively rare because of the narrow legal grounds for them and the financial practicalities involved. A good bankruptcy attorney will advise you about this, will prepare your bankruptcy paperwork to discourage such challenges, and will help derail any such challenges if any are raised.

 

Obligation To Be Honest in Bankruptcy

Posted by Kevin on January 28, 2018 under Bankruptcy Blog | Comments are off for this article

A constant theme in consumer bankruptcies is that a fundamental purpose of bankruptcy is to give the honest but unfortunate debtor a fresh financial start.

The fresh start is effectuated, in part, by allowing a debtor to get a discharge of his or her debts. “Discharge” is the permanent legal write-off of debts. The law says that all debts get discharged, except those that fit specific exceptions.

Exceptions to Getting a Discharge

There are two types of exceptions to the discharge of your debts.  The first excepts discharge as to specific debts (while the remainder of the debts are discharged).  The second excepts discharge as to all of your debts.

1.  Specific Debts Not Discharged

Many of my clients have a general understanding that certain debts may not be dischargeable.  They are surprised , however, when they find out how many different debts are or may not be dischargeable.  The Rules indicate that the debtor or any creditor may file an action relating to the dischargeablilty of a debt.  However, in practical terms, these debts fall into 3 groups based on how the debtor and her attorney may decide to deal with with the issue of dischargeability during the course of the bankruptcy.

  • debts such as unpaid child support are never dischargeable and, for the most part, no special action need be taken by either the creditor or debtor;
  • debts including  income taxes and  student loans are dischargeable but only under certain conditions.  Since the taxing authority and student loan holder will usually begin collection efforts upon the conclusion of the bankruptcy, the onus usually falls on the debtor to apply to the court for a determination relating to dischargeability; or
  • debts incurred through misrepresentation or fraud are deemed dischargeable unless  a creditor objects AND successfully proves the misrepresentation to the satisfaction of the court.

2. NO Debts Discharged

The second, less familiar set of exceptions is actually more dangerous. That’s because these doesn’t affect just a specific debt or two. Rather this set of exceptions affects your ability to receive a discharge of ANY of your debts whatsoever in a Chapter 7 case.

The following kinds of dishonesty could result in not being able to discharge your debts in a Chapter 7 case:

  • Hiding or destroying assets during the year before filing bankruptcy
  • Hiding or destroying assets after the bankruptcy case is filed
  • Hiding, destroying, falsifying, or failing to keep records about your financial condition
  • Failing to satisfactorily explain a loss of assets before the filing of bankruptcy
  • Making a false oath.

Actions to deny discharge of all debts can be brought by a creditor, the trustee assigned to the case, or the United States Trustee’s office.  A negative result is devastating to a debtor.  At a seminar, I recall a judge referring to this type of denial of a general discharge as a death sentence for a debtor.

Conclusion

Most of the time, you’ll be able to discharge all the debts you expect to discharge. Furthermore, your right to an overall discharge of debts will very likely not be challenged. But if you have ANY reason for doubt about these, be sure to tell your bankruptcy lawyer. And do so right away, preferably early in your first meeting.

 

Satisfying the Debtor Education Requirement

Posted by Kevin on November 27, 2017 under Bankruptcy Blog | Comments are off for this article

In a prior blog, we talked about the credit counseling course that a debtor must take before he or she can file under Chapter 7 or 13.  After the petition is filed, the debtor must take the debtor education course.  This is sometimes called the personal financial management course.

The course is given by a non profit budget and credit counseling agency approved by the United States Trustee.  The course is usually taken online but, depending on the provider, can be done over the phone, or even in person.  The  purpose of the course is to provide the debtor with insight into his or her current financial situation which led to the bankruptcy, and how to budget income and expenses to avoid financial problems going forward.

The debtor education course requirement was part of the 2005 amendments to the Bankruptcy Code.  As I stated in the blog dealing with the credit counseling course, in my opinion, one of unspoken policies for the 2005 amendments to the Bankruptcy Code was to discourage bankruptcy filings by making them more time consuming and expensive.   The debtor education course requirement (just as the credit counseling course requirement) is an additional hoop through which a debtor is forced to jump.  Hate to sound cynical, but in the 12 years since the 2005 amendments, I have never had a debtor tell me how valuable either course was.

So, what happens if you decide to save a few bucks by not taking the debtor education course.  The punishment is draconian.  No course taken- no certificate of completion filed with the Clerk of the Bankruptcy Court, no discharge.  That means that your debts are not wiped out.

I remind my clients at the meeting of creditors that if they have not already taken the debtor education course, they should do so immediately.

Let’s say you mess up and don’t take the course.  Any recourse?  You may be able to re-open your case to take the course and file the certificate of completion.  However, you will incur additional legal and filing fees.  In the meanwhile, because your debts are not discharged, your creditors can take action to collect of their debts.  Finally, there is some risk that the judge will not let you reopen the case.  Don’t put yourself in that position.

 

Bankruptcy Is a Moral Choice

Posted by Kevin on August 26, 2017 under Bankruptcy Blog | Comments are off for this article

Is Filing Bankruptcy a Moral Choice?

As a bankruptcy practitioner, I take for granted that filing for bankruptcy is a practical, economic choice.  But for many of my clients, it is also a moral choice.  They took the money or used the credit with the good faith expectation that they would pay back the creditor, and now they cannot.  Does that make them a bad person?  How do you reconcile this apparent disconnect?

For many of my clients with misgivings about filing, I advise to meet the issue head on.  You’ll feel better (even good) about the decision only after you believe in your head and in your heart that it really is the right step to take.

How to Make a Good Moral Decision 

1. What got you to this point of your finances?

 You made legal commitments to pay your debts. What has changed so that you are having trouble now meeting those honest intentions to pay? What is making you seriously consider breaking those commitments permanently?  

2. Understand your present: what are the costs and benefits of now trying to meet those financial commitments?

The moral benefit  of not filing is that you would be keeping your promises to pay your debts. It’s easy to fixate on this and feel guilty about breaking these honest promises. But how about the real costs if you kept struggling to meet them? Consider your physical health, and your emotional health as you deal with the constant stress. Consider the debts’ effect on your marriage and family relationships.  What financial and emotional responsibilities do you have to spouse, children, parents, siblings, community that you just can’t handle?  You clearly have moral obligations to all these people in addition to obligations to your creditors.

3. You CAN make a good decision: you now have the opportunity to choose and act wisely.

Face your situation honestly. Don’t hide from the truth, even if it means accepting that you’ve made mistakes. Own them. But don’t beat yourself up about them. Focus on the future. Focus on what you have to do (or not do) to insure a better economic future.  Not just generalizations but concrete steps.  Resolve to make better economic (and other) decisions every day going forward.  And then walk the walk.

4. Get good advice: you can only make good decisions if you know your legal and practical options.

You can’t make good economic or moral choices about how to attack your debts without knowing your legal alternatives for doing so.  You can’t know whether the best way to deal with your creditors if you don’t know those legal options.  It may turn out that credit counseling will allow you to manage your debts within your budget and without filing bankruptcy.  It may turn out that a Chapter 13 payment plan fits your set of life obligation better than a Chapter 7 “straight bankruptcy”.  But you cannot make those decisions unless you have the facts and options.

5.  Weigh your legal options: consider effects on your creditors, yourself, your spouse, your family, and anyone else involved.

Get help from the right people and resources. Do whatever helps YOU make a good decision.  Although bankruptcy attorneys are legal advisors, experienced bankruptcy attorneys have dealt with many people in their careers who have focused not only on the economic issues but the moral issues in filing bankruptcy.  Discuss these concerns with your attorney.  It will help you make the best, well informed decision which is the first step to a much better future.

 

Dumping Your Chapter 13 Case Midstream

Posted by Kevin on August 20, 2017 under Bankruptcy Blog | Comments are off for this article

You can usually get out of an ongoing Chapter 13 “adjustments of debts” bankruptcy case by simply asking to do so.

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Unlike Chapter 7, if you file a Chapter 13 case you can end it—“dismiss” the case—at any time, and in just about any circumstance. But why the difference?

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Explicit Right to Dismiss

Why can a Chapter 13 case be dismissed by the debtor? Because unlike with Chapter 7, Section 1307(b) of the Bankruptcy Code says so. And quite strongly.

“On request of the debtor at any time… the [bankruptcy] court shall dismiss a case under this chapter [13].”

Notice that the debtor can ask for a dismissal “at any time.” This implies that the request could come any time during the life of a Chapter 13 case, including when it might be particularly inconvenient for a creditor. Or whenever. Also notice that the court does not seem to have any discretion about whether or not to dismiss–it “shall” dismiss the case. Not “may” or “might” dismiss it, but “shall” do so.

An Absolute Right to Dismiss?

Actually there has been debate among bankruptcy judges about whether a court can ever prevent a Chapter 13 case from being dismissed on request of a debtor. And a number of judges have decided that in situations of serious abuse or fraud by the debtor, there are other provisions in the law that trump this section and prevent a Chapter 13 case from being dismissed.  But still, in the vast majority of situations, a request by a debtor to dismiss a Chapter 13 case results in its near-immediate dismissal.

Why So Different Than Chapter 7?

But why does the Bankruptcy Code—the federal statute governing bankruptcy—provide for a right to dismiss a Chapter 13 case when it does not provide for Chapter 7 dismissal the same way?

Because (beyond the reasons given in the last blog related to Chapter 7) when Congress established the bankruptcy options, it wanted to encourage debtors to file Chapter 13 cases. This was in part so that they paid back at least some of their debts. Congress probably also recognized that filing a Chapter 13 case is generally riskier than filing Chapter 7. That’s mostly because it involves making payments diligently over the course of years, while not getting the reward of the discharge (legal write-off) of the debts unless successfully getting all the way to the end of it. To encourage taking on the risk of starting a Chapter 13 case, Congress made it easy to get out of it if things did not go as planned.

When Chapter 7 “Straight Bankruptcy” is Not So Straightforward

Posted by Kevin on July 25, 2017 under Bankruptcy Blog | Comments are off for this article

How can you tell if your Chapter 7 case will be straightforward? Avoid 4 problems.

 

Most Chapter 7 cases ARE straightforward. Your bankruptcy documents are prepared by your attorney and filed at court, about a month later you go to a simple 10-minute hearing with your attorney, and then two more months later your debts are discharged—written off. There’s a lot going on behind the scenes but that’s usually the gist of it.

But some cases ARE more complicated. How can you tell if your case will likely be straightforward or instead will be one of the relatively few more complicated ones?

The four main problem areas are: 1) income, 2) assets, 3) creditor challenges, and 4) trustee challenges.

1) Income

Most people filing under Chapter 7 have less income than the median income amounts for their state and family size. That enables them to easily pass the “means test.” But if instead you made or received too much money during the precise period of 6 full calendar months before your case is filed, you can be disqualified from Chapter 7. Or you may have to jump through some more complicated steps to establish that you are not “abusing” Chapter 7. Otherwise you could be forced into a 3-to-5 year Chapter 13 case or your case could be dismissed—thrown out of court. These results can sometimes be avoided with careful timing of your case, or even by making change to your income before filing.

2) Assets

Under Chapter 7 if you have an asset which is not protected (“exempt”), the Chapter 7 trustee can take and sell that asset, and pay the proceeds to the creditors. You may be willing to surrender a particular asset you don’t need in return for the discharge of your debts. That could especially be true if the trustee would use those proceeds in part to pay a debt that you want and need to be paid anyway, such as back payments of child support or income taxes. Or you may want to pay off the trustee through monthly payments in return for the privilege of keeping that asset. In these “asset” scenarios, there are complications not present in the more common “no asset” cases.

3) Creditor Challenges to the Dischargeability of a Debt

Creditors have a limited right to raise objections to the discharge of their individual debts. This is limited to grounds such as fraud, misrepresentation, theft, intentional injury to person or property, and similar bad acts. With most of these, the creditor must raise such objections to dischargeability within about three months of the filing of your Chapter 7 case—precisely 60 days after your “Meeting of Creditors.” Once that deadline passes your creditors can no longer complain, assuming that they received notice of your bankruptcy case.

4) Trustee Challenges to the Discharge of All Debts

In rare circumstances, such as if you do not disclose all your assets or fail to answer other questions accurately, either in writing or orally at the trustee’s Meeting of Creditors, or if you don’t cooperate with the trustee’s review of your financial circumstances, you could possibly lose the right to discharge any of your debts. The bankruptcy system largely relies on the honesty and accuracy of debtors. So it is quite harsh towards those who abuse the system through deceit.

No Surprises

Most of the time, Chapter 7s are straightforward. The most important thing you can do towards that end is to be completely honest and thorough with your attorney during your meetings and through the information and documents you provide. That way you will find out if there are likely to be any complications, and if so whether they can be avoided, or, if not, how they can be addressed in the best way possible.

 

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 Persistent Myth About Taxes and Bankruptcy

Posted by Kevin on March 29, 2017 under Bankruptcy Blog | Be the First to Comment

Many people believe that bankruptcy can’t write off any income taxes. In fact, it is not uncommon for non-bankruptcy attorneys to lump taxes in with other priority debts like alimony and child support payments (which are not dischargeable) and student loans (which are dischargeable in bankruptcy upon a showing of undue hardship).

Through the next few blog posts, you’ll learn what taxes can be discharged and what can’t. The fact is that bankruptcy can discharge taxes of many types and in many situations. Sometimes ALL of a taxpayer’s taxes can be discharged, or most of them. But there ARE significant limitations, which I will explain carefully in those blogs.

Besides the possibility that you may be able to discharge some or all of your taxes, bankruptcy can also:

1. Stop tax authorities from garnishing your wages and bank accounts, and levying on (seizing) your personal and business assets.

2. Prevent post petition accrual of interest and penalties in certain situations.

3. If paid through a plan, limits your payments to what is affordable as opposed to what the taxing authority demands.

4. Eliminate other debts so that money is available to pay the taxing authority.

Overall, bankruptcy gives you unique leverage against the IRS and/or your state or local tax authority. It gives you a lot more control over a very powerful class of creditors. Your tax problems are resolved not piecemeal but rather as part of your entire financial package. So you don’t find yourself focusing on your taxes while worrying about the rest of your creditors.

The laws relating to taxes and bankruptcy are somewhat complex and not easily handled by “do it your selfers”.  It is recommended that a prospective debtor seek out an attorney with experience in taxes and bankruptcy.

 

Note I mentioned students loans above.  If that is your issue, you can contact me on this website or on http://studentdebtnj.com

 

Your Income Tax Debt Paid through an “Asset Chapter 7 Case”

Posted by Kevin on October 17, 2016 under Bankruptcy Blog | Comments are off for this article

Here’s an unusual way of paying your income tax debt. The circumstances don’t line up very often, but when they do this procedure can work very nicely.

Generally, when filing a Chapter 7 “straight bankruptcy” a key goal is to keep everything that you own. You don’t want to surrender anything to the Chapter 7 trustee.

But sometimes you own something or a number of things that aren’t exempt. If so, one of your options may be to file a Chapter 13 case to protect your non-exempt asset(s). Almost always that option requires 3-5 years of payments.

If you don’t mind letting go of the non-exempt asset(s), a much quicker option is an “asset Chapter 7 case.” The bankruptcy trustee sells the non-exempt assets and uses the sale proceeds to pay your creditors.

What are the type of non-exempt assets that would fit into this scenario?  It’s not going to be your home.  (That is why we have Chapter 13)  But, say you recently closed down a business.  You may still own some of the business assets, but you have no use for them.  Or you may own a boat or an off-road vehicle that, for whatever reason, you no longer want to keep.  And you owe taxes that are otherwise non-dischargeable. That means the taxing authority will wait until the bankruptcy case is closed, and then start harassing you again for payment.

Under the Bankruptcy Code, in a Chapter 7, debts are paid according to a specific priority schedule.   Taxes have priority over credit card debt, medical debt, or the deficiency on a car loan after repossession.

But, what types of debts have priority over taxes?  The most important are the trustee commission and his/her professional fees.  This could amount to a few dollars.   Other than that, the most typical debts that have priority over taxes are unpaid child and spousal support.

So if you do not owe back support, then the trustee will pay your taxes after paying the trustee’s commission and professional fees to the extent funds are available.

Again, it’s not common that the “stars will line up”.   But when it does, it can be a big plus.  Also, this is not basic stuff so you will need an experienced bankruptcy attorney to navigate you through.

Choosing Between Filing Chapter 7 and 13–Easy or Not?

Posted by on April 28, 2016 under Bankruptcy Blog | Be the First to Comment

Chapter 7 and 13 are very different debt-fighting tools. But that doesn’t necessarily mean it’s obvious which is right for you.

 

The Not Always So Easy Choice

Once it is clear that you need bankruptcy relief, picking the right Chapter to file can be simple. Your circumstances may all point towards one option or the other. But sometimes it can be far from clear cut.

 

The First Impression IS Often Right

To be clear, when my clients first come in to see me, many have a good idea whether they want to file a Chapter 7 or a 13.  There is lots of information available about this, including on this website. So lots of my clients come in having done some homework. Or at least they’ve heard something about the two Chapters and have an impression which makes sense to them.   But sometimes after we have reviewed all the facts and options, the initial impression  proves wrong.

 

An Illustration

Let’s say you have a home you’ve been struggling to hold onto for the last year or two, but by now have pretty much decided it wasn’t worth doing so any more. You’re seriously behind on both the first and the second mortgages. Like so many other people, the home is worth a lot less than you owe. In fact, let’s say you owe on the first mortgage a little more than what the home is worth, plus another $75,000 on the second mortgage, so the home is “under water” by that amount. Although for the last couple of years you’ve been hoping that the market value will start heading back up, but it’s just held steady. You and your family would definitely like to stay there, buy you absolutely can’t pay both mortgages. Besides it makes little economic sense to keep struggling to hang onto property worth $75,000 less than what you owe. So you’ve decided it’s time to give up on the home, and just file a Chapter 7 bankruptcy.

But then you meet with your bankruptcy attorney and find out some surprising good news. Because your home is worth less than the balance on the first mortgage, through a Chapter 13 case you can “strip” the second mortgage off the title of your home. You no longer have to make the monthly payments on it, making keeping your home all of a sudden hundreds of dollars cheaper each month.  In return for paying into your Chapter 13 Plan a designated amount each month based on your budget, and doing so for the three-to-five year length of your Chapter 13 case, you can keep your home usually by paying very little—and sometimes nothing—on that $75,000 second mortgage. At the end of your case, whatever amount is left unpaid on that second mortgages would be “discharged”—legally written-off—so you own the home without that mortgage. You are debt-free, other than your first mortgage.

This “stripping” of the second mortgage is NOT available under the Chapter 7 that you initially thought you should file. The ability to keep your home by significantly lowering its monthly cost to you and bringing the debt against it much closer to its value could well swing your choice towards filing Chapter 13, contrary to your initial intention.

So, the Best Advice:  Meet with Your Attorney with an Open Mind

 

Make Sure You Do Qualify for the Essential “Automatic Stay”

Posted by on April 20, 2016 under Bankruptcy Blog | Be the First to Comment

Very rarely, the filing of a bankruptcy will NOT stop the creditors from chasing the debtor. Here’s how to avoid this happening to you.

 

The Essential “Automatic Stay”

In just about every bankruptcy case, stopping creditors from pursuing you and your assets is a crucial part of what you get for filing the case—regardless whether it’s a Chapter 7 or Chapter 13 case. This benefit of filing bankruptcy—called the “automatic stay”—generally applies to every case, to every creditor, and to just about to everything that a creditor can do related to collecting a debt.

Exceptions to the automatic stay are there, however, and can put you in a very bad position.  About 2 weeks ago, I had a frantic telephone call from a homeowner  who stated his house was being sold in three weeks.  He was confused because he filed Chapter 13 and then he got notice of sale.  He called the lender who refused to cancel the sale.  After some questions, I discovered that this Chapter 13 filing was the second such filing in the last three months.  The first Chapter 13 was dismissed for failure to file the schedules and plan.

BAPCPA, THE 2005 REVISIONS TO THE BANKRUPTCY CODE, PUT RESTRICTIONS ON THE AUTOMATIC STAY

Before BAPCPA, a very small minority of people filing bankruptcy would file a series of separate cases, one after another, with the intention each time of using the new “automatic stay” of each new case to repeatedly delay a foreclosure or some other collection action.  Congress decided that this was an inappropriate use of the bankruptcy laws, and put a stop to it by taking away the benefit of the “automatic stay” as follows.

The Two Rules

The First Rule: The “automatic stay” WOULD NOT go into effect at all when filing a new case if within the past year you had filed two or more other bankruptcy cases, and those earlier cases had been dismissed.  If this were to happen, the “automatic stay” COULD potentially still be applied to your case after filing but only by convincing the bankruptcy judge that you meet certain conditions.

The Second Rule: The “automatic stay” WOULD go into effect filing a new case if within the past year you had filed one other bankruptcy case, which was dismissed, BUT the “automatic stay” would expire after 30 days. Its expiration COULD be avoided, but only by convincing the bankruptcy judge that you meet certain conditions.

The conditions referred to above that you’d have to meet for imposing or preserving the “automatic stay” involve justifying why the previous case(s) was (were) dismissed and why the present case is being filed. (The details of these conditions are complicated and beyond what can be covered in this blog.)

Watch Out to Make Sure of No Prior Recent Bankruptcy

Be careful because sometimes people can file a bankruptcy case and have it dismissed without realizing or remembering what happened. For example, if someone files a bankruptcy case without an attorney, and somehow does not complete it, the case would get dismissed. Or is someone does hire an attorney and the case gets filed, because of some miscommunication the case could get dismissed. Either way, months later when this person wants to file bankruptcy he or she could not understand or recall that in fact a case did get filed and dismissed.

So…

Avoid this problem by thinking carefully about whether there is any possibility that a bankruptcy case was filed in your name in the past 365 days. And if it possibly happened, tell your attorney about it right away.

Paying Part or All of Your Income Tax Debt through an “Asset” Chapter 7 Case

Posted by on May 24, 2015 under Bankruptcy Blog | Comments are off for this article

Give gladly to your Chapter 7 trustee assets that you don’t need, if most of the proceeds from sale of those assets are going to pay your taxes.

 

We are in a midst of a series of blogs about bankruptcy and income taxes. Today we describe a procedure that doesn’t happen very often, but in the right circumstances can work very nicely.

Turning Two “Bad” Events into Your Favor

Most of the time when you file a Chapter 7 “straight bankruptcy,” one of your main goals is to keep everything that you own, and not surrender anything to the Chapter 7 trustee. To that end, your attorney will usually protect everything you own with appropriate property “exemptions.”

If instead something you own can’t be protected, and so must be surrendered to the Chapter 7 trustee, that’s often considered a “bad” thing because you’re losing something.

And that leads to a second “bad” thing—the trustee selling that “non-exempt” property and using the proceeds to pay your creditors.  That usually does you no good because those creditors which receive payment from the trustee usually are ones that are being written off (“discharged”) in your Chapter 7 case, so you’d have no legal obligation to pay anyway.

But it may well be worth giving up something you own—particularly if it is something not valuable to you in your present circumstances—if doing so would have the consequence of paying some or all of your income tax debt that isn’t being written off in your Chapter 7 case.

Circumstances in which the Trustee would Pay Your Income Taxes

Consider the combination of the following two circumstances:

1)      You own something not protected by the applicable property “exemptions,” which you either don’t need or is worth giving up considering the other alternatives.

2)      The proceeds from the trustee’s sale of your “non-exempt” asset are mostly going to be paid towards taxes which otherwise you would have to pay out of your own pocket.

Let’s look at these two a little more closely.

“Non-Exempt” Assets You Don’t Need or Are Worth Giving Up

Although most people filing bankruptcy do NOT own any “non-exempt”—unprotected—assets, there are many scenarios in which they do. In some of those scenarios, those assets are genuinely not needed or wanted, so giving them to the trustee is easy. For example, a person who used to run a now-closed business, and still owns some of its assets, may have absolutely no use for those business assets. Or a person may own a boat, or an off-road vehicle, or some other recreational vehicle, but because of health reasons can no longer use them.

More commonly, a person may own a “non-exempt” asset which he or she would prefer to keep, but surrendering it to the trustee is much better than the alternative. That alternative is often filing Chapter 13—the three-to-five year payment plan. In the above example of a boat owned by somebody who can no longer use it, he or she may have a son-in-law who would love to use that boat. But that would probably not be worth the huge extra time and likely expense of going through a Chapter 13 case.

Allowing Your Trustee to Pay Your Non-Discharged Income Taxes

Letting go of your unnecessary or non-vital assets makes sense if most of the proceeds of the trustee’s sale of those assets would go to pay your non-dischargeable income taxes. Under what circumstances would that happen?

The Chapter 7 trustee is required by law to pay out the proceeds of sale of the “non-exempt” assets to the creditors in a very specific order. If you don’t owe any debts which have a higher “priority” than your income taxes, then the taxes will be paid in full, or as much money as is available, ahead of other creditors lower in order on the list.

The kinds of debts which are AHEAD of income taxes on this priority list include:

  • Child and spousal support arrearage
  • Wages, salaries, commissions, and employee benefits earned by your employees (if any) during the 180 days before filing or before the end of the business, up to $10,000
  • Contributions to employee benefit plans, with certain limitations

If you know that you do not owe any of these higher “priority” debts, then the trustee will pay your taxes (after paying the trustee’s own fees), to the extent funds are available, assuming the tax creditor files a “proof of claim” on time specifying the tax debt.

As you can imagine, each step of this process must be carefully analyzed by your attorney to see if it is feasible, and if so then it must be planned and implemented by your attorney. Again, it will only work in very specific circumstances. But when the stars are aligned appropriately, this can be a great way to get your taxes paid.

A Chapter 7 Can . . . Help You Walk Away from Your Business Yet Preserve Your Business Assets

Posted by Kevin on February 23, 2015 under Bankruptcy Blog | Comments are off for this article

Often, by the time you are ready to file a personal bankruptcy, your business has no meaningful assets—no inventory or equipment, no receivables, no brand or business name that you could sell. That simplifies your situation because, whether the business is in your own name or under an assumed business name as a sole proprietorship, or is in the form of a corporation, limited liability company, or partnership, its lack of assets avoids a bunch of thorny issues. If your business doesn’t have any assets you don’t need to worry about how to protect them, or how to distribute them to the business’ creditors

BUT, what  if your business DOES have some assets?

As long as your prior business was in the form of a sole proprietorship, your personal bankruptcy filing will immediately protect your business assets (as well as your personal ones) from seizure by garnishment, foreclosure, repossession and such. That’s because the assets of your business are legally treated as your assets, and are thus protected by your bankruptcy.

As for secured debts related to the business—secured by collateral like your business vehicle or equipment, for example—the creditor would be prevented from repossessing its collateral, at least temporarily. That gives time for your attorney to offer for you to “reaffirm” the debt—agree to remain personally liable on it—so that you can keep the collateral. Unless the collateral is worth more than what is owed on it—not likely—your Chapter 7 trustee would have no interest in the collateral.

Instead, the trustee will be interested in your “free and clear” business assets (not subject to a lien). However, you will be able to keep such assets to the extent they are covered by your personal “exemptions.”

A property exemption is a provision in state or federal law that allows you to shelter an asset from your creditors, and thus also from the Chapter 7 bankruptcy trustee who acts on behalf of all your creditors. Exemption laws can be quite complicated, and differ from state to state, often radically. In some states you must use that state’s system of exemptions, while in other states you have a choice of using either the state’s exemptions or a set of federal exemptions provided in the Bankruptcy Code.  In NJ, you can choose; however, since the NJ exempts are so puny, about 98% of debtors pick the federal exemptions.

The federal tool of trade is as follows:

The debtor’s aggregate interest, not to exceed $2,175 in value, in any implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor.

(the $2,175 amount is for cases filed through March 31, 2013). This amount is doubled for married couples filing jointly, as long as the asset is jointly owned.  Admittedly, that does not sound like a lot of money.  However, you do not value the property as if it were new.  It is valued in its “as is, where is” condition.   In some cases, the value can be pennies on the dollar.  If the trustee differs with your valuation, he or she will have to bring in an appraiser to challenge your valuation.  If the trustee loses this battle in court, then there is no money in he estate to pay the appraiser.  A trustee does not want to get into that position, so he or she will either abandon the property to the debtor or engage in some “horse trading”.  The bottomline is that the debtor stands a good chance of getting the bulk of his business property for free or at a nominal cost.

 

A Chapter 7 Can . . . Help You Walk Away from Your Business Yet Preserve Your Business Assets

Posted by Kevin on December 23, 2014 under Bankruptcy Blog | Comments are off for this article

Protect your business assets immediately with the “automatic stay” and permanently with property exemptions.

 

Often, by the time you are ready to file a personal bankruptcy, your business has no meaningful assets—no inventory or equipment, no receivables, no brand or business name that you could sell. That simplifies your situation because, whether the business is in your own name or under an assumed business name as a sole proprietorship, or is in the form of a corporation, limited liability company, or partnership, its lack of assets avoids a bunch of thorny issues.

BUT, even if your business DOES have some assets, as long as that business is a sole proprietorship, filing a personal Chapter 7 case often provides you a sensible way for dealing with those remaining business assets. You may be able to keep those assets if you need them, or if not, you can let your Chapter 7 trustee sell them and pay some of your most important creditors.

Business Assets Protected by the “Automatic Stay”

You may want to keep business assets which you need to use to generate income after your bankruptcy—either as an employee or through self-employment.

As long as your prior business was in the form of a sole proprietorship, your personal bankruptcy filing will immediately protect your business assets (as well as your personal ones) from seizure by garnishment, foreclosure, repossession and such.

As for secured debts related to the business—secured by collateral like your business vehicle or equipment, for example—the creditor would be prevented from repossessing its collateral, at least temporarily. That gives time for your attorney to offer for you to “reaffirm” the debt—agree to remain personally liable on it—so that you can keep the collateral.

Business Assets Protected by Property “Exemptions”

Instead, the trustee will be interested in your “free and clear” business assets. However, you will be able to keep such assets to the extent they are covered by your personal “exemptions.”

A property exemption is a provision in state or federal law that allows you to shelter an asset from your creditors, and thus also from the Chapter 7 bankruptcy trustee who acts on behalf of all your creditors. Exemption laws can be quite complicated, and differ from state to state, often radically. In some states you must use that state’s system of exemptions, while in other states you have a choice of using either the state’s exemptions or a set of federal exemptions provided in the Bankruptcy Code.  NJ allows a debtor to choose; however, it is not much of a choice.  Why? Because the state exemptions are so puny that about 99.9% of debtors use the federal exemptions.  Under the federal exemptions, you get to keep a little over $2,000 of business tools.  Under NJ, it would come under the general exemption of $1000.  Clearly, in either case, the exemption is far from generous.  However, if the assets are older but usable to you, you can make an offer to the trustee.  Most trustee will entertain even a lowball offer rather than go through an auction, especially on used items of questionable value.

A Chapter 7 “Straight Bankruptcy” Can . . . Help You Avoid or Escape Litigation When Closing Down Your Business

Posted by Kevin on November 29, 2014 under Bankruptcy Blog | Comments are off for this article

Ongoing litigation, or the threat of it, against you and/or your business, usually dies with your bankruptcy filing.

_________________________

A Chapter 7 case can help by:

  • immediately stopping most litigation against you and/or your business, at least temporarily;
  • permanently stopping most litigation by legally discharging the disputed claim; and
  • providing strong disincentives for your adversary to keep pursuing you after your bankruptcy filing.

_________________________

This series of blogs is about the benefits of filing a bankruptcy case when closing down your business. The reality is that businesses are often closed as a consequence of litigation, or the threat of litigation, against the business or business owner. These disputes can take every possible form—by way of example, simple collection actions by creditors, contractual disputes with customers, enforcement action by governmental regulators, and fights with other business owners or investors. A bankruptcy often becomes necessary when either the opposing party wins a judgment against the business and/or the owner, or the business runs out of money to pay the attorney fees and other costs of litigation. The business is often already on the ropes, and the judgment, or just the financial and emotional costs of the lawsuit, or sometimes even just the threat of one is enough to persuade the business owner to throw in the towel and close down the business.

The question is: what will happen to the dispute and/or litigation against you and/or the business?

Litigation Immediately Stopped by the “Automatic Stay”

The automatic stay legally stops creditors from taking any new collection action against you, and from continuing any action, including litigation. It is imposed simultaneously with the filing of your bankruptcy, without a judge needing to sign an order. The automatic stay requires your adversary to at least take a pause in his efforts against you, and often persuades him to do nothing further against you.

Why Most Disputes Will End at Your Bankruptcy Filing

This immediate stopping of collection and litigation usually ends up being permanent, for a number of reasons.

Your adversary is usually trying to get you or the business to pay something, and that alleged obligation is discharged—legally written off permanently—in your Chapter 7 case.

Bankruptcy law does allow any of your creditors (including those with alleged claims of any kind) to try to object to the discharge of their debts or claims. But these objections are relatively rare, for two reasons:

1. They are difficult for a creditor to win. The legal grounds for objections are relatively narrow. Debts are assumed discharged unless the creditor can prove to the bankruptcy court that those narrow grounds are met. Instead of just proving the existence of a valid debt or claim, as in a conventional lawsuit, the creditor has to provide convincing evidence that you engaged in certain specific bad behavior, such as fraud in incurring the debt, embezzlement, larceny, fraud as a fiduciary, or intentional and malicious injury to a person or property.

2. The creditor is faced with practical indications that it is wasting its time and money to pursue you further. In filing bankruptcy, you present to the court a rather detailed set of specific information about your finances. You are able to be questioned by the creditors about those documents and about anything else relevant to the discharge of the debts. When these reveal that you genuinely have nothing worth chasing—which is almost always the case—most creditors accept that pursuing you further will do them no good.

The Exceptions:  Disputes Not Be Stopped by Your Bankruptcy Filing

There are two sets of exceptions: 1) when you are not protected by the automatic stay; and 2) when a creditor challenges the discharge of its debt or claim. These will be addressed in the next two blogs.