Posted by Kevin on June 6, 2012 under Bankruptcy Blog | 
The point of filing bankruptcy is to get relief from your debts. So, under what conditions DO those debts get “discharged”—legally written off—in a regular Chapter 7 bankruptcy?
Here’s what you need to know:
1. You WILL receive a discharge of your debts, as long as you play by the rules. Under Section 727 of the Bankruptcy Code, the bankruptcy court “shall grant the debtor a discharge” (“shall”is a catch word among lawyers which means the court must do it ) except in relatively unusual circumstances:
- If you’re not an individual! Corporations and other kinds of business entities do not receive a discharge of debts, only human beings do.
- If you’ve received a discharge in an earlier case too recently. You can’t get a new discharge of your debts in a Chapter 7 case if:
- you already received a discharge of debts in an earlier Chapter 7 case filed no more than 8 years before your present case was filed, or
- you already received a discharge of debts in an earlier Chapter 13 case filed no more than 6 years before your present case was filed (except under limited conditions).
- If you hide or destroy assets, conceal or destroy records about your financial condition (This does not mean that you cannot find a bank statement from 2 years back. It means that you are playing games and not turning over things)
- If in connection with your Chapter 7 case you make a false oath, a false claim, or withhold information or records about your property or financial affairs.
2. ALL your debts will be discharged, UNLESS a particular debt fits one of the specific exceptions. Section 523 of the Code lists those “exceptions to discharge.” I’m not going to discuss those exceptions in detail here, but the main ones include:
- most but not all taxes
- debts incurred through fraud or misrepresentation, including recent cash advances and “luxury” purchases
- debts which were not listed on the bankruptcy schedules on time
- money owed because of embezzlement, larceny, or through other kinds of theft or fraud in a fiduciary relationship
- child and spousal support
- claims against you for intentional injury to another person or property
- most but not all student loans
- claims against you for causing injury or death to someone by driving while intoxicated (also applies to boating and flying)
3. A discharge from the bankruptcy court stops a creditor from ever attempting to collect on the debt. Under Section 524, the discharge order acts as a court injunction against the creditor from taking any action—through a court procedure or on its own–to “collect, recover, or offset any such debt.” If a creditor violates this injunction by trying to pursue a discharged debt, the bankruptcy court may hold the creditor in contempt of court and, depending on the seriousness of its illegal behavior, can require the creditor to pay sanctions.
Posted by Kevin on under Bankruptcy Blog |
“Presumption” that certain recent credit card purchases and cash advances will not be discharged in bankruptcy
Some types of debts get written-off (“discharged”) in bankruptcy. Others do not. Included in the list of those that might NOT be discharged are those “incurred through fraud or misrepresentation, including recent cash advances and ‘luxury’ purchases.” Today’s blog focuses on these types of debts. In fact, this blog just looks at one particular subcategory of these debts—those that the Bankruptcy Code says “are presumed to be nondischargeable.” What is this “presumption,” how does it work, and what should you do about it?
The Fraud/Misrepresentation Exception to Discharge
First of all, the idea behind this exception to discharge is that debtor who cheats the creditor to borrow the money or get the credit should not be able to discharge that debt in bankruptcy. That follows one of the most basic principles of bankruptcy, that is, the purpose of bankruptcy is to give a fresh start to an honest debtor.
The Point of a “Presumption”
Debts which potentially belong to this fraud/misrepresentation category of debts ARE discharged UNLESS the creditor formally objects to the discharge of the debt within a rather quick deadline, usually 60 days after your meeting with the bankruptcy trustee. That objection would be in the form of a lawsuit the creditor files at the bankruptcy court. In that lawsuit the creditor lays out the facts of fraud or misrepresentation that would justify the debt not being discharged. The creditor would then need to prove those facts with evidence. The debt is still discharged unless the creditor present evidence that leads the bankruptcy judge to decide that the debt was in fact obtained by the debtor’s fraud or misrepresentation.
A presumption in the bankruptcy law that a debt is not dischargeable simply makes it much easier for the creditor to prove that point. The creditor simply needs to establish that those circumstances apply to the challenged debt. Then that debt is “presumed” not to be discharged. And it will not be discharged unless the debtor can bring contrary evidence showing the lack of fraud or misrepresentation by him or her. In terms that may be familiar, a presumption “shifts the burden of proof” from the creditor to the debtor.
Why is this important? Litigation is expensive. Most cases are settled before going to trial because the amounts at issue are not worth the costs of battling it out in court. Congress has decided in two sets of circumstances to tip the advantage in favor of the creditors, by giving them the presumption of no discharge.
The “Luxury Goods or Services” Presumption
The first of these circumstances arises if a consumer incurs a debt of more than $500 in “luxury goods or services” in the 90 days before filing the bankruptcy. That debt is presumed not to be dischargeable, meaning that the creditor doesn’t need to bring evidence establishing that the debtor intended to cheat the creditor by not paying the debt. The thought behind this is that either the person making the purchase knew he or she was going to file bankruptcy and was not going to pay the debt, or else at least was quite reckless to be using creditor that close to filing bankruptcy.
So what are “luxury goods or services”? Broader than it sounds. They include anything except those “reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.” The court decides what fits that definition. It’s up to the debtor to persuade the court that the goods and/or services totaling more than $500 were “reasonably necessary,” or that the debt was incurred with the honest intention, at that time, of paying it.
The Cash Advances Presumption
The second of these circumstances arises if a consumer incurs a debt of more than $750 through a cash advance or advances made in the 70 days before filing the bankruptcy. In the same way as with the “luxury goods” presumption, the creditor does not need to bring evidence establishing that the debtor did not intend to pay the debt. And in the same way, the debtor can try to persuade the court that the cash advance was incurred with the intention of paying it.
Debts for Luxury Goods or Cash Advances Outside the Presumption Period
In these situations the presumption would not apply. So the creditor would have to show the court convincing evidence that you did not intend to pay the debt. Since that is often not easy to show, creditors are not as likely to challenge purchases and cash advances that were made before the presumption period.
Avoiding These Presumptions
Avoid these presumptions by not using any credit and making cash advances in the few months before filing bankruptcy. If you did makes such purchases before the expiration of the presumption periods, you can hold off on your filing until the presumption periods have ended. Allowable but not 100% foolproof. It just put a tougher burden on the creditor.
Posted by Kevin on June 4, 2012 under Bankruptcy Blog |
Most of the time your attorney will know which debts will be legally written off in your bankruptcy. But not always, for two reasons.
A couple of blogs ago I made the point that the discharge order entered on your behalf by the bankruptcy judge will write off all of your debts, EXCEPT for those types of debts which are on a list in Section 523 of the Bankruptcy Code. The most common ones on the list include:
a. most but not all taxes
b. debts incurred through fraud or misrepresentation, including recent cash advances and “luxury” purchases
c. debts which were not listed on the bankruptcy schedules on time in a case involving assets to be distributed to creditors
d. money owed because of embezzlement, larceny, or through other kinds of theft or fraud in a fiduciary relationship
e. child and spousal support
f. claims against you for intentional injury to another person or property
g. most but not all student loans
h. claims against you for causing injury or death to someone by driving while intoxicated (also applies to boating and flying)
These different types of debts each deserve a closer look, which I will do in upcoming blogs. But let’s go back to the question in today’s title. Most of the time your attorney can reliably tell you whether a particular debt will be discharged in your bankruptcy case. But sometimes he or she will not know because:
1. With some types of debts—the ones described in items b, d, and f of the list above—the debt is discharged unless that creditor raises an objection by a specific deadline (which is usually 60 days after your meeting with the trustee). So the best your attorney can do is point out to you that you may have a problem. He or she sometimes may know that reputation of a given creditor to object under similar facts- a rough risk assessment. But whether the risk is high or low, with these types of debts neither your attorney nor you will know for sure whether that debt will be discharged until either the creditor objects or the deadline for objection passes without objection.
2. With the other types of debts—the ones described in items a, c, e, g, and h of the list above—at the beginning of the case sometimes either the facts are not sufficiently clear or how the law should be applied to the facts is not clear, or both. You might think that the attorney should get all the necessary facts before filing the case. But sometimes the facts are simply not available, the additional work to get them is not worth the cost, or there is no time to do so because of the need to file the case quickly. Add in the consideration that the bankruptcy statutes often use broad language that can be and is in fact interpreted differently by different judges. As a result, in these situations there is simply no absolute way to know at the start of the case whether a particular debt will be discharged.
Take as an example one of the types of debt listed—a claim against you for fraud or misrepresentation. Since intent of the debtor and reliance by the creditor are issues that the court must consider, it is not clear cut whether a claim of fraud can stand up. For example, if you fudge your income on a loan application, but the lender based the loan on the value of the collateral instead of your income, then the lender did not rely on your stated income. No reliance, no fraud; therefore, the obligation is dischargeable. But your attorney will not know this until discovery is conducted (and that’s only if the lender rep tells the truth.) So you can see that in these “gray areas” your attorney may well not be able to tell you in advance whether that particular debt will be discharged.
When you are consulting with an attorney about a bankruptcy filing, it is important to give that attorney all pertinent facts about your debts. Moreover, you should ask your attorney whether any of your debts may not be discharged.
Posted by Kevin on June 1, 2012 under Bankruptcy Blog |
Sometimes choosing between Chapter 7 and 13 is easy, but other times it means carefully weighing lots of considerations. Whether the choice is easy or hard, one of those considerations is how these two options compare in their discharge (legal write-off) of your debts.
The good news in favor of Chapter 13 is that it discharges a couple more types of debts than Chapter 7 does. So in the right case this “super discharge” could be reason enough to choose Chapter 13.
The bad news is about timing—the discharge is not effective until the very end of a Chapter 13 case—usually 3 to 5 years after it is filed. That means you have to successfully complete the case to get a discharge of your debts. In other words, you need to make all payments under the plan before you get the discharge. The fact is that a significant percentage of Chapter 13 cases are not successfully completed. If the case is converted to Chapter 7, the debtor is still eligible for for less inclusive Chapter 7 discharge. If the Chapter 13 is dismissed, however, the debts are still owed. That’s a risk that needs to be seriously considered before filing a Chapter 13 case.
The Mini “Super Discharge”
In the past, one way that Congress encouraged debtors to file Chapter 13s is by allowing various kinds of debts to be discharged under Chapter 13 that could not be discharged under Chapter 7. Chapter 13 was said to provide a “super discharge.” But over the last quarter-century or so, Congress has whittled away at the list of debts treated more favorably under Chapter 13 until now only two noteworthy ones remain:
1. You can discharge non-support obligations owed to an ex-spouse in a Chapter 13 case (and not in a Chapter 7 one). These obligations usually include those in a divorce decree requiring you to pay off a joint marital debt or to pay the ex-spouse to compensate for you receiving more than your share of the marital property. They are often called the “property settlement” part of your divorce.
2. An obligation arising from a “willful and malicious” injury that you are accused of causing to a person or to property can be discharged in Chapter 13. This refers to allegations that you hurt somebody or their property not merely through your negligence—which would be discharged in Chapter 7—but instead either intentionally or recklessly—the discharge of which could be challenged in a Chapter 7 case.
These are both very delicate areas. What’s a “property settlement” type of divorce obligation instead of a support obligation, and what’s a “willful and malicious” injury instead just of a negligent one—these are often not straightforward distinctions. The decision to use Chapter 13 to undo part of a divorce decree or to escape accusations of “willful and malicious” injury can have a variety of considerations. Moreover, if substantial amounts of money are involved, it is likely that the ex-spouse or victim of injury will file an action within the bankruptcy to challenge the discharge. This will add to the expense and complexity of the case.
As a practical matter, a prospective debtor and his or her attorney must carefully analyze the debtor’s situation to determine not only whether the debtor can make the payments under a Chapter 13 plan but whether the benefits of Chapter 13 outweigh the potential pitfalls.
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Posted by Kevin on May 12, 2012 under Bankruptcy Blog |
According to a report issued by the Administrative Office of the US Courts, bankruptcy filings were down 11.5 percent in 2011. Yippee, the economy must be getting better! Not so fast.
As I have stated more than once on this blog, one of the purposes of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, also known as BAPCPA, was to get more debtors to file under Chapter 13 so that creditors could get some payments as opposed to a no asset Chapter 7 where there are no payments to creditors.
The stark reality is that under BAPCPA attorneys have to do significantly more work in a consumer Chapter 7 or in a Chapter 13. Moreover, the attorney has to have a more complete understanding of the the statute and case law, because the reality is that there are fewer and fewer “easy cases”. More attorney time means higher legal fees. More complexity means higher legal fees. In fact, under the old law, the average legal fee for Chapter 7 in NJ was about $800-1200. Now, it is $1500-2200. A run of the mill Chapter 13 ran $1500-1800. Now, the basic fee is $3500 usually with court approved add on fees of a few hundred.
Moreover, irrespective of whether the debtor files under Chapter 7 or 13, BAPCPA requires more papers to produced by the debtor (which takes time), useless counseling sessions which run about $100-150, credit reports and judgment searches so that the debtor’s attorney can prove to the trustee that he/she engaged in due diligence ($100), comparative market analysis and the like.
So my take is that the main reason that filings are down is because BAPCPA has made the process unnecessarily complex and expensive. But that was just my take. Recently, however, Professor Lois Lupica of the University of Maine School of Law conducted a study of some 11,000 consumer cases under BAPCPA and confirmed what most bankruptcy lawyers in NJ know- the process under BAPCPA is expensive. Prof Lupica found out of pocket costs in no asset Chapter 7’s are up over 50%, and what she termed Total Direct Access Costs (attorney fees, filing fees, credit counseling fees and the like) are up 37% in Chapter 7 and 24% in Chapter 13’s. Finally, Lupica found that lawyers are put under increased stress because of the complexity of the law, and the perceived need to keep expenses down for the debtor.
So, is the economy getting better or has Congress made bankruptcy an alternative that is too expensive for many otherwise qualified debtors?
Posted by Kevin on April 1, 2012 under Bankruptcy Blog |
Say on St. Patty’s day, you go to the parade in Hoboken (not this year); hoist a few; drive home and get into an accident. Thank heavens, you did not kill anybody, but a couple of people were hurt and sue you. Moreover, the Bergen County police (or Passaic County, take your pick) nail you for DWI. The injured get judgments against you. You file bankruptcy.
You are not going to get a discharge from the debts associated with the injuries. Section 523(a)(9) excepts from discharge a debt associated with death or personal injury caused by the debtor’s operation of a motor vehicle, boat or aircraft if debtor were legally intoxicated on alcohol or drugs. Moreover, the creditor does not have to file a complaint in the bankruptcy to have the debt declared non-dischargeable. In a recent Kentucky case, the insurance carrier of a person injured in a car accident with the debtor who was DWI notified state authorities of a judgment after a discharge was granted. The insurance company never filed a dischargeability complaint in the bankruptcy. The debtor’s driver’s license was suspended. He incurred costs in getting his license reinstated including attorneys fees and sued the insurance company for violation of the discharge injunction. Held: FOR THE INSURANCE CARRIER. Under subsection (a) (9), the creditor does not need to file in bankruptcy court. In this case, the discharge order indicated that debts from personal injuries incurred while debtor is DWI are not discharged. In additon, the court held that the insurance carrier steps into the shoes of the injured party since it paid the injured party. The solution: DON’T DRINK AND DRIVE.
Posted by Kevin on March 14, 2012 under Bankruptcy Blog |
Bankruptcy gives the honest debtor a fresh start. We hear that often. Bankruptcy courts are courts of equity. Hear that too. We also hear words like “good faith”, “fairness”, and “substance over form”. These are not just empty platitudes but heart felt beliefs held by the court, trustees and a vast majority of practitioners.
The Code allows debtors to discharge most of their debts. That means that they go away. Chapter 13, which requires monthly payments over a period of 36 to 60 months, provides not only a discharge if all payments are made under a plan that was approved by the court, but also allows the debtor to adjust the obligations to certain secured creditors. A secured creditor is a creditor that has collateral. Like GMAC lends you money to buy a car and takes the car as collateral.
Now, in Chapter 13, you can adjust the interest rate on your car loan. So, if your loan is for 14%, you may, subject to court approval, reduce it to, say, 4%. The creditor can object to that treatment. Then, the court decides what is fair, what is good faith.
In a recent case in South Florida, a Chapter 13 debtor went too far. He bought a 2007 Suzuki and financed it at 19.95% interest. Less than 90 days later, he filed Chapter 13. In his plan, the debtor proposed to pay 5.25% interest. The debtor testified at the confirmation hearing and was cross-examined by the finance company’s lawyer. Debtor admitted that he conferred with and retained bankruptcy counsel just before he bought the car. Of course, he did not tell the car dealer that he was going to file. The court found that the debtor “pulled a fast one”, and bought the car knowing that he would knock down the interest rate in his plan. The court stated that good faith focuses on whether the filing is fundamentally fair to the creditors. Debtor was not fair. The Court found that the debtor must pay the contract rate of 19.95%. if he wanted the plan confirmed.
So play it straight.
Posted by Kevin on February 22, 2012 under Bankruptcy Blog |
I have spoken with a number of people who are in a tough economic situation because of the ongoing recession. The economy soured in 2008. They were laid off in 2009, and have been on unemployment since then. In the meanwhile, they have accumulated debt and fear legal action. Or have had judgments entered against them. Normally, the simple answer is that such a person would be a candidate for bankruptcy. But, there is an added wrinkle. The person filed Chapter 7 before and received a discharge. Can that person file bankruptcy again?
The law is that a person can file a Chapter 7 and receive a discharge but only if the second filing is 8 years after the first filing. How do you measure the 8 years? Say you filed Chapter 7 on August 1, 2004 and were discharged on January 15, 2005. When can you file Chapter 7 again and get a discharge? The answer is August 2, 2012. We measure the 8 years from filing date to filing date.
What if you accumulated new debt shortly after your first discharge or you fell behind on your mortgage.? Creditors are not going to wait 8 years. Well, you can file a Chapter 13 and obtain a discharge of debts if the Chapter 13 filing is 4 years after the Chapter 7 filing. Once again, the 4 years is measured from filing date to filing date.
These are the basic rules. In future blogs, we will explore situations where it may be advantageous to file a Chapter 13 within 4 years of filing a Chapter 7.
Posted by Kevin on February 13, 2012 under Bankruptcy Blog |
The New Bankruptcy Law (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) was adopted by Congress after a decade of lobbying by banks and the credit card industry. These groups argued that the Bankruptcy Code of 1978 allowed debtors who could afford to pay some of their debt off the hook by making Chapter 7 too available. They wanted more debtors to be required to file under Chapter 13 where they would have to make monthly payments for 36-60 months.
My position, which has been set forth in this blog and in an ezine article, is that the law is a failure, that Chapter 13 filings are down, and that the cost of bankruptcy has practically doubled. All you have to do is look at the yearly statistics compiled by the bankruptcy clerk in NJ. You will see that initially Chapter 13 filings were up, but now, the ratio of Chapter 13 to Chapter 7 filings is about the same as when BAPCPA was enacted. Costs are up because BAPCPA makes the lawyers do significantly more work, requires the debtor to take two dubious courses, and requires the debtor to pay for additional searches and credit reports to demonstrate due diligence.
Well, a recent study bears out my conclusions. A study conducted on over 11,000 bankruptcy cases from 90 judicial districts on cases filed from 2003 to 2009 indicated that costs had increased and distributions in Chapter 13 cases had gone down. Now, 11,000 cases is just a drop in the bucket since about 1,000,000 cases are being filed annually. But, it is a decent sample and goes beyond what is referred to as “anecdotal reporting”. The other thing the study found was that even though fees had increased, the lawyers doing Chapter 7’s and 13’s are being squeezed on fees by the courts and, at the same time, required to do more work. This is leading to more mistakes and more stress to both attorneys and their clients.
What does this all mean to a Bergen County resident who is considering filing bankruptcy. Well, on a philosophical level, it demonstrates that new may not mean better. Second, it should be an indication to the consumer that the process is not going to be particularly quick or cheap. Third, if you are content with getting it done on the cheap, beware, sometimes you do get what you pay for.
Posted by Kevin on January 29, 2012 under Bankruptcy Blog |
One on the advantages of Chapter 13 is that you can extend payments on long term debt. Section 1322 (b)(2) allows a debtor to modify the rights of holders of secured claims (collateralized claims) other than claims secured only by a security interest in the debtor’s principal residence. Section 1322 (b) (5) allows the debtor to cure defaults and make periodic payments during plan on debts where the last payment on the debt is due after the last payment under a plan.
Read more of this article »
Posted by Kevin on January 16, 2012 under Bankruptcy Blog |
Now, that my seem like a harsh title. You may have spent an extended period on unemployment because of the prolonged economic downturn. While you were on unemployment, you used up all your savings and went into debt. You sent out hundreds of resumes and spent hours on the net looking for a job- even if it was for less than your prior jobs. Things are now looking up. You are back to work. But, now is the time to be wary.
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Posted by Kevin on January 15, 2012 under Bankruptcy Blog |
If you file a bankruptcy under Chapter 7 and the case has assets to distribute (not a no asset case) or you file a Chapter 13 case, creditors are required to file a proof of claim to participate in the bankruptcy.
The burden is on the creditor to file before the bar date and provide sufficient backup to justify the claim. In today’s marketplace, however, many claims are sold to hedge funds or other companies for pennies on the dollar. In many cases, these claim purchasers do not have any backup to support their allegation that they have a claim. If challenged, the claim can be expunged and the creditor is SOL.
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Posted by Kevin on January 9, 2012 under Bankruptcy Blog |
It appears that the economy is getting better. On a national level, bankruptcy filings went from 132,173 in October, 2010 to 106,255 in October 2011. This is a reduction of 19.6%. In New Jersey, bankruptcy filings went from 3,511 to 2,995 over the same period of time. That is a reduction of 14.7%. Not as good as the national numbers, but still pretty good.
Now, does that mean the economy is getting better, or does it mean that people are so bad off that they don’t have enough money to file bankruptcy?
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Posted by Kevin on January 2, 2012 under Bankruptcy Blog |
Credit card debt is almost always discharged in bankruptcy. That means that you do not have to pay the debt. If a creditor tries to collect a credit card debt while the bankruptcy is pending, that is called a violation of the automatic stay. If it happens after the bankruptcy discharge and close of the case, it is a violation of the bankruptcy injunction against collecting discharged debts.
But there is another way to get a debt “discharged”. That occurs when a credit card company does not sue you before the statute of limitations runs. This is sometimes referred to as “expired debt”. In NJ the statute of limitations is usually 6 years. In the past, if a credit card company did not sue before the statute of limitations ran, they were SOL.
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