New Jersey bankruptcy lawyer Kevin Hanly represents Chapter 7 and 13 bankruptcy clients living in northern New Jersey counties, including Hudson County, Essex County, Bergen County, Passaic County, Union County, Morris County, and Sussex County.
Posted by Kevin on November 21, 2019 under Bankruptcy Blog | Comments are off for this article
The key players in bankruptcy are the debtor, creditors, the bankruptcy clerk and judge, and the bankruptcy trustee and the U.S. Trustee.
Bankruptcy can be confusing. It helps to know the main players and what each does. We’ll cover the first two listed above today. Next time we’ll cover the rest.
Debtor
The debtor is the person or business entity filing the bankruptcy case.
The debtor has to qualify to file bankruptcy. Sometimes qualifying is easy, sometimes it’s harder. The qualifications are different for Chapter 7 “straight bankruptcy” than they are for Chapter 13 “adjustment of debts.” The “means test” is most important in Chapter 7, while in Chapter 13 having “regular income” and not too much debt.
A debtor has a number of “duties.” These mostly involve honestly completing some forms for the bankruptcy court and attending a so-called “meeting of creditors.” You’re also required to “cooperate as necessary” with the bankruptcy trustee and the U. S. Trustee. (We’ll get into this more coming up when we tell you about the different trustees).
Creditors
The creditors are of course the businesses and individuals to which the debtor owes debts.
Creditors participate in your bankruptcy case, or often don’t participate, mostly based on the kind of debt owed.
Creditor’s debts are either secured or unsecured. “Secured” means that the debt is legally tied to something you own. That gives the creditor the right to take that something from you if you don’t pay the debt. A debt can be secured by something you bought at the time you created the debt, like a vehicle loan. It can be secured by something you owned beforehand, like a personal loan secured by your possessions. Or it can be secured by operation of the law, like an income tax or judgment lien. A creditor has more leverage over you if its debt is secured and you want to keep that “security.”
Unsecured debts can be “priority” or “general unsecured.” “Priority” debts are legally favored for various reasons. The main examples among consumer debts are recent income tax debts and any child or spousal support. “Priority” debts generally get paid in full before anything gets paid on “general unsecured” debts under various bankruptcy procedures.
For most people most of their creditors have “general unsecured” debts. Those are all debts that are either not secured or not “priority.” They include most credit card balances, medical bills, personal loans, utility bills, vehicle loan deficiency balances, unsecured personal loans, and countless other kinds of unsecured obligations.
Creditors Getting Involved
Although creditors can be involved in the bankruptcy process in a lot of ways, they tend to be less involved than you expect. Most unsecured general creditors decide that getting involved is not worth their cost or effort. Secured creditors do tend to get involved so that you make appropriate arrangements depending on whether you want to keep their “security.”
Sometimes other creditors have grounds to challenge your ability to “discharge”—legally write off their debts. Your lawyer will inform you if there seem to be any such grounds. Be sure to tell him or her if you have any creditors who may have an emotional stake in your financial life (such as ex-spouses or ex-business partners.) These sometimes get involved in your case, whether doing so would financially benefit them or not.
Posted by Kevin on November 12, 2019 under Bankruptcy Blog | Comments are off for this article
Whether you want to keep your vehicle or get rid of it, and whether you are current or behind on your payments, Chapter 7 bankruptcy can address the issue.
The “Automatic Stay” Gives You the Chance to Decide to Keep or Surrender
As long as you file your Chapter 7 case before your vehicle gets repossessed, your lender can’t repossess it once you do file. The same “automatic stay” law that stops all your creditors from calling you, suing you, and garnishing your wages also stop your vehicle lender from repossessing your vehicle—at least for a month or so while you decide whether to keep your car or not.
Surrendering Your Vehicle
If you decide to surrender your vehicle, Chapter 7 bankruptcy is often the best way to do so. The reason is because with most vehicle loans even after surrendering the vehicle, you would still owe money to your lender after the surrender. This “deficiency balance” is the amount you owe after the lender repossesses the vehicle, sells it—usually at auction, pays itself its costs of repossession and sale out of the proceeds of sale, and then pays the rest of the proceeds towards your loan’s interest, late fees, and principal balance. Based on how vehicles depreciate and how much is owed on the loan, this scenario almost always creates a deficiency.
Surrendering your vehicle during your Chapter 7 case allows you to legally and permanently write off (“discharge”) that entire remaining debt, including any potential deficiency.
Keep Your Vehicle
If you want to keep your car or truck, whether you are current on your loan, and if not how quickly you can catch up, are crucial.
If You Are Current
If you want to keep your vehicle and are current at the time your Chapter 7 case is filed, and can keep making the payments on time, it’s simple. The Code provides that you can reaffirm the debt. You sign a “reaffirmation agreement” stating that you intend to keep your vehicle and give your consent that the obligation to the vehicle lender will not be discharged. The Court must approve the reaffirmation agreement after a hearing. The downside is that if you default going forward, the lender will repossess, sell the vehicle and come after you for any deficiency because the underlying debt was never discharged.
The Court must approve the reaffirmation agreement after a hearing. The Court can withhold approval of a reaffirmation agreement if it is not in the best interests of the debtor.
Prior to the 2005 revisions to the Bankruptcy Code, a debtor could retain and pay without reaffirming the debt. Although not specifically written into the Code, it was allowed by the courts and pretty much accepted practice. In that case, any potential deficiency was discharged and you just continued paying. So, if you defaulted in the future, the lender could repossess but not come after you for a deficiency.
That very pro debtor situation was pretty much written out of the 2005 amendments to the Code. Now, that option is usually available only if the lender consents. Or, if the Court refuses to approve the reaffirmation agreement because it is not in the best interests of the debtor. Although the Code does not specifically state what happens in such a situation, NJ bankruptcy judges do not allow a repossession if payments are kept current. Moreover, if you default down the road, the underlying debt is discharged so all the lender can do is repossess the collateral.
If You Are Not Current
If you want to keep your vehicle and aren’t current on the vehicle loan at the time your Chapter 7 case is filed, your options are more limited. You would usually need to get current very quickly to be able to keep the vehicle—usually within a month or two. Moreover, you would need to reaffirm the debt going forward.
Potentially save thousands of dollars on your vehicle loan by filing bankruptcy when it qualifies for cramdown.
Chapter 13 Vehicle Loan Cramdown
What’s a “cramdown”? It’s an informal term—not found in the federal Bankruptcy Code—for a procedure provided under Chapter 13 law for legally rewriting the loan to reduce, usually, both the monthly payment and the total you pay for the vehicle. A cramdown, essentially reduces the amount you must pay to the fair market value of your vehicle, often also reducing the interest rate, and also often stretching out the payments over a longer period. These combine to result often in a significantly reduced monthly payment, and an overall savings of thousands of dollars.
Qualifying for Cramdown
First, this only works if your vehicle is worth less than the balance on the loan.
Second, emphasizing again, it is ONLY available in a Chapter 13 case, not Chapter 7.
And third, your vehicle loan must have been entered into more than 910 days (slightly less than two and a half years) before your Chapter 13 case is filed.
Vehicle Cramdown
It’s of course that last condition that creates the timing opportunity. When you first go in to see your attorney, bring your loan vehicle paperwork (or as much information you have) to see if and when you qualify for cramdown, and whether and how much difference it can make for you.
Here’s an example of the dollar difference that a difference in timing can make.
How Good Timing Can Work for You
Let’s say you bought and financed your car 890 days ago—that’s almost two and a half years. The new car cost $21,500. You did not get a very good deal; your previous car had died and cost way too much to repair, and you had to quickly get another car to commute to work. You put down $500 (from a credit card cash advance), then financed the vehicle for $21,000 at 8% over a term of 5 years, with monthly payments of $425.
Now almost two and a half years later you owe about $11,500. If you wanted to keep the car, and filed either a Chapter 7 or Chapter 13 case before the 910-day mark, you would have to pay the regular monthly payments for the rest of the contract term. With interest, that would cost a total of about $12,650 more.
Consider if instead you waited until just past that 910-day mark and filed a Chapter 13 case then, and could “cram down” the car loan. Assume that your car is now worth $7,500, and again you owe $11,500. The loan is said to be secured to the extent of $7,500. The remaining $4,000 of the loan is not secured by anything. So the $7,500 secured portion would be paid through monthly payments in your Chapter 13 plan. The $4,000 unsecured portion is treated as general unsecured debt and paid prorata with the rest of those creditors. It does not constitute extra money paid into the plan.
Under cramdown, you pay the $7,500 secured portion at an interest rate which is often lower than your contract rate. Paying a reduced amount—$7,500 instead of $11,500—at a lower interest rate results in a lower monthly payment. That payment is often reduced substantially further by extending the repayment term further out than what the contract had provided, up to a maximum of five years (from the date of filing the Chapter 13 case).
In this example, assuming an interest rate of 5% and a repayment term of five years, the payment on the $7,500 would be less than $142 per month. The total remaining payments on the loan, with interest, would be about $8,492, in contrast to paying $12,650 under the contract. That is a savings of $4,158.
Note that under cramdown, even though the repayment term stretches the payments about two and a half years longer than under the contract, the amount of interest to be paid is often less. That’s both because the interest rate is often lower, and it’s being applied to a lower principal amount (here 5% interest instead of 8%, and $7,500 instead of $11,500).
So, by tactically holding off from filing a Chapter 13 case until after the 910-day period expires, in this example you would reduce the monthly payment from $425 to $141.50, and save more than $4,000 before owning the vehicle free and clear.
Both Chapter 7 and Chapter 13 will stop a foreclosure.
The Bankruptcy Code says that a bankruptcy “petition filed… operates as a stay, applicable to all entities, of—… any act to… enforce [any lien] against any property of the debtor… .” See Section 362(a)(4). This means that the mere filing of your bankruptcy case will immediately stop a foreclosure from happening.
But What if the Foreclosure Still Occurs?
But what if your bankruptcy case is filed just hours or even minutes before the foreclosure sale, but the foreclosing mortgage lender or its attorney can’t be contacted in time for them to be informed? Or what the lender is contacted in time but messes up on its instructions to its foreclosing attorney so that the foreclosure sale mistakenly still takes place? Or what if the lender refuses to acknowledge the effect of the bankruptcy filing and deliberately forecloses anyway?
As long as the bankruptcy is in fact filed at the bankruptcy court BEFORE the foreclosure is conducted, the foreclosure would not be legal. Or at least would very, very likely be immediately undone. It does not matter whether the foreclosure happened mistakenly or intentionally.
A Foreclosure by Mistake
If a foreclosure happens by mistake after a bankruptcy is filed, or because the lender didn’t find out in time, lenders are usually very cooperative in quickly undoing the effect of the foreclosure. It is usually not difficult to establish that the foreclosure occurred after the bankruptcy was filed, and that usually quickly resolves the issue. If a lender fails to undo such a foreclosure after being presented evidence that the bankruptcy was filed first, the lender would be in ongoing violation of the automatic stay. This would make the lender liable for significant financial penalties, so they usually undo the foreclosure right away.
A Foreclosure Purposely Conducted after Your Bankruptcy is Filed
This almost never happens. If you are harmed by a foreclosure intentionally done after your bankruptcy filing, you can “recover actual damages, including costs and attorneys’ fees, and in appropriate circumstances, may recover punitive damages.” See Section 362(k). Bankruptcy judges are not happy with creditors who purposely violate the law. Enough of them have been slapped that most creditors know better.
Chapter 7 vs. Chapter 13
For purposes of stopping a foreclosure that is about to happen, it does not matter whether you file a Chapter 7 or Chapter 13 case. The automatic stay is the same under both.
But how long the protection of the automatic stay lasts can most certainly depend on whether you file a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.” That’s because even though you get the same automatic stay, each Chapter gives you very different tools for dealing with your mortgage. That’s why your mortgage lender will likely react differently depending on which Chapter you file under and how you propose to deal with the mortgage within each.
Posted by Kevin on October 3, 2019 under Bankruptcy Blog | Comments are off for this article
Powerful Chapter 13 gives you tools to solve your mortgage and other home lien problems from a number of different angles.
The Limits of Chapter 7 “Straight Bankruptcy”
In my last blog I described how a Chapter 7 case can under certain circumstances help you enough to save your home., or, at least, delay a foreclosure for a limited time.
The Extraordinary Tools of Chapter 13
Chapter 13, on the other hand, provides you a range of much more powerful and flexible tools for solving many, many debt issues so that you can keep your home.
Here are the first five of ten significant ways that Chapter 13 can save your home (with the other five to come in my next blog).
Under Chapter 13 case you can:
1. stretch out the amount of time for catching up on back mortgage payments for as long as 5 years. This is in contrast to the one year or so that most mortgage lenders will give you to catch up if you do a Chapter 7 case instead. This longer period can greatly lower your monthly catch-up payments, making more likely that you would succeed in actually catching up and keeping your home.
2. slash your other debt obligations so that you can afford your mortgage payments. The mortgage debt—especially your first mortgage—can’t be significantly changed under Chapter 13. So you are usually required to pay your full monthly mortgage payment, and to catch up any arrearage, but to accomplish this you are allowed to pay to most of your other debts.
3. permanently prevent income tax liens, and child and spousal support liens, and such from attaching to your home. The “automatic stay” preventing such liens under Chapter 7 last usually only about 3 months, and there’s no mechanism for dealing with these kinds of debts. Instead under Chapter 13, these liens are prevented throughout the three-to-five-year length of the case.
4. have the time to pay debts that can’t be discharged (legally written off) in bankruptcy, all the while being protected from those creditors attacking your home. So even if a tax or support lien is already in place before you file, you are given the opportunity to pay the debt while under the protection of the bankruptcy laws. That undercuts the leverage of those liens against your home. Then by the end of your case, the debts are paid and those liens are released.
5. discharge (write off) debts owed to creditors which could otherwise attack your home. For example, certain (generally older) income taxes can be discharged, leaving you owing nothing. But had you not filed the Chapter 13 case, or delayed doing so, a tax lien could have been recorded, which would have required you to pay some or all of the balance to free your home from that lien. Even most standard debts can turn into judgment liens against your house once you are sued and a judgment is entered. Depending on the facts, a judgment liens may or may not be able to be gotten rid of in bankruptcy. If instead you file a Chapter 13 case to prevent these liens from happening, at the end of your case the debt is gone, and no such liens attach to your home.
See my next blog post for the other five house-saving tools of Chapter 13.
Posted by Kevin on September 19, 2019 under Bankruptcy Blog | Comments are off for this article
Bankruptcy can prevent future judgment liens. It usually stops a lawsuit from turning into a judgment, and then a judgment lien on your home.
Judgment Liens Are Dangerous
Our last blog post was about how filing bankruptcy can sometimes remove, or “avoid,” a judgment lien from your home. This is a great potential benefit of bankruptcy if a judgment lien has already been recorded.
But it is often much better to file a bankruptcy case before a judgment lien hits your home’s title. Here are a few of the practical reasons why:
You have to meet certain strict conditions to be able to avoid the judgment lien. If you don’t meet them, even bankruptcy won’t get rid of that lien on your home. You may have to pay all or part of the debt in spite of filing bankruptcy.
Even if you succeed in avoiding the lien in your bankruptcy case, it is an extra step that can cost you more. And the cost can go up substantially if the creditor fights your lawyer’s efforts to avoid the lien. Besides higher lawyer fees, you may have to pay for a home appraisal and for the court testimony of the appraiser.
The existence of a judgment lien adds uncertainty, and thus some extra anxiety, to your bankruptcy process. The goal of bankruptcy is relief. So it’s better to prevent a judgment lien from hitting your home than messing with it after it has hit.
Judgment Liens Are Preventable
Filing bankruptcy usually stops an ongoing lawsuit against you from turning into a judgment. Bankruptcy’s “automatic stay” immediately stops “the… continuation… of a judicial, administrative, or other action or proceeding against the debtor… .”
Filing bankruptcy also usually prevents future lawsuits against you from being filed much less turning into judgments. The automatic stay” immediately stops “the commencement… of a judicial, administrative, or other action or proceeding against the debtor… .” Section 362(a)(1) of the U.S. Bankruptcy Code.
The exceptions are debts that cannot be written off (“discharged”) in bankruptcy, such as certain ones based on fraud, income taxes, child or spousal support, most student loan debt and criminal behavior. But bankruptcy does discharge most debts. So filing bankruptcy will stop ongoing and future lawsuits on most of your debts. And it will prevent those debts from turning into dangerous judgment liens on your home.
The Timing Can Be Crucial
You know when things are going south financially. You are making no more than minimum payments on your credit cards. You miss payments here and there but convince yourself that you will make it up next month. But you don’t make it up. Debt collectors are calling daily. And the dunning letters are also coming in. You could bury your head in the sand and that will lead to lawsuits, judgments, and judgment liens on your home.
Most times, it is best to be proactive. At the very least, you should be seeking out an experienced bankruptcy attorney to analyze your situation and let you know whether bankruptcy can be an effective tool to deal with your creditors.
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.
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.
Posted by Kevin on August 19, 2019 under Bankruptcy Blog | Comments are off for this article
Do you have a judgment lien on your home? If so, the debt on that judgment is secured by whatever equity you have in your home.
A judgment lien on your home gives the creditor holding the judgment lien legal rights against your home. A judgment lien holder on your home can, under some circumstances, foreclose on your home. At the least, it can force you to pay the debt when you sell or refinance your home.
Bankruptcy can help. Filing bankruptcy usually results in the legal write-off (the “discharge”) of the debt. The problem is that in many situations bankruptcy does not curtail creditors’ lien rights which pass through the bankruptcy. Even though you discharge that debt, the lien still survives. It can and does come back to haunt you even after a successful bankruptcy.
However, with a judgment lien on your home, bankruptcy often CAN get rid of the judgment lien. This is a potentially huge benefit of filing bankruptcy. The process of getting rid of a judgment lien within bankruptcy is called “judgment lien avoidance.”
The Conditions for Judgment Lien Avoidance
Here’s how the process works.
When you file bankruptcy, to “avoid” a judgment lien you must file what is called a motion with the Court and meet certain conditions:
The lien you’re getting rid of must be a “judicial lien.” That’s legally defined as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.” Mostly, this refers to judgment liens.
The judgment lien can attach to “real property or personal property that the debtor or a dependent of the debtor uses as a residence.”
The judgment lien can’t be for child or spousal support or for a mortgage.
The judgment lien “impairs” the homestead exemption. In earlier versions of the Bankruptcy Code, the concept of impairment was, at times, confusing. However, under the current Code, it is pretty much a straightforward analysis.
Essentially, you’re entitled to protect the equity in your home provided by the homestead exemption. To the extent a judgment lien eats into that homestead exemption-protected equity, that portion of the lien is avoided, or negated.
For Example
Assume you had $20,000 of equity in your home beyond your first mortgage. Assume also that your designated homestead exemption amount is $25,000. (This varies by state.) This would mean that all of that $20,000 in equity would be protected by the homestead exemption. Then add that a hospital got a judgment against you of $15,000 which became a judgment lien recorded against your home. If you filed a bankruptcy case and moved to avoid that judgment lien, it would be completely avoided because:
It’s a judicial lien—one “obtained by judgment.”
The lien attaches to your homestead—the place you “use as a residence.”
The lien was not for child or spousal support or related to a mortgage.
All of this $15,000 judgment lien impairs your homestead exemption—eats into the home equity, all of which is protected by the exemption.
In this example, bankruptcy would very likely discharge the $15,000 hospital debt itself. And the motion to avoid the judgment lien would very likely be successful. You would no longer owe the debt. And your home would no longer be encumbered by the judgment lien.
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.
Debtors’ prisons? There’s that and a lot more to the very colorful history of bankruptcy law.
American bankruptcy law naturally grew out of the law of England during our colonial history. Pre-Revolutionary War bankruptcy laws were extremely different from current law.
The first bankruptcy law in England was enacted more than 450 years ago during the reign of Henry VIII. Debtors were called “offenders” under this first law, in effect seen as perpetrators of a property crime against their creditors. The purpose of this law, and as expanded during the following hundred and fifty years, was not to give relief to debtors. Rather it was to provide to creditors a more effective way to collect against their debtors.
Given this purpose, it is not surprising that this first law did not give debtors a discharge—a legal write-off—of their debts. In a bankruptcy the assets of the “offender” were seized, sold, and the proceeds distributed to creditors. And then the creditors could still continue pursuing the “offender” for any remaining balance owed.
A bankruptcy proceeding could only be started by creditors, not by debtors. Creditors accused a debtor of an “act of bankruptcy,” such as physically hiding from creditors, or hiding assets by transferring them to someone else. The current extremely seldom used “involuntary bankruptcy” is a remnant of this.
Strangely, only merchants could file bankruptcy. Why? Credit was seen as immoral, with only merchants being allowed to use credit, for whom it was seen as a necessary evil. As the only ones who had access to credit, only merchants had the capacity to become bankrupt.
For the following century and a half through the late 1600s, Parliament made the law even stronger for creditors, allowing bankruptcy “commissioners” to break into the homes of “offenders” to seize their assets, put them into pillories (structures with holes for head and hands used for public shaming), and even cut off their ears.
Finally in the early 1700s the discharge of debts was permitted for cooperative debtors, but only if the creditors consented!
Yet the law still provided for the death penalty for fraudulent debtors (although it was very seldom used).
Cooperative debtors received an allowance from their own assets, the very early beginnings of the current Chapter 13 “adjustment of debts.”
So this was the English bankruptcy law that was largely in effect at the time that the U.S. Constitution was adopted. That gives some perspective on what the framers may have had in mind with the Bankruptcy Clause of the U. S. Constitution. That Clause gave Congress power to “pass uniform laws on the subject of bankruptcies.” Fortunately the language is so open-ended that it gave bankruptcy laws the opportunity to evolve during the last two hundred fifty years into one infinitely both more compassionate and beneficial for the economy.
But this evolution during our national history was extremely rocky, until surprisingly recently. That is the topic of the next blog.
Posted by on July 14, 2019 under Bankruptcy Blog | Comments are off for this article
Besides wiping out (“discharge” is the legal term) your personal debts like credit cards and medical expenses, a Chapter 7 case can discharge all or most of your personal liability from a closed sole proprietorship, corporation, LLC, or partnership. You are liable for the debts of a sole proprietorship and a partnership. You can be liable for LLC or corporate debt to the extent that you signed a guarantee or in other circumstances.
“Asset” and “No Asset” Chapter 7
Chapter 7 is sometimes called the liquidation form of bankruptcy. That usually does NOT mean that if you file a Chapter 7 case, all of your assets will be liquidated or sold. One of the main purposes of the Bankruptcy Code is to give an honest debt a fresh start. You get a fresh start by the discharge of most of your debts and keeping property that is exempt.
As a debtor in New Jersey, you can choose the exemptions listed in the Bankruptcy Code (called the federal exemptions) or you can use the exemptions provided under New Jersey statutes. Since the federal exemptions are much more favorable to the debtor than the New Jersey exemptions, almost all NJ debtors utilize the federal exemptions. If everything you own is exempt, you would have a “no asset” case, so-called because the Chapter 7 trustee has no assets to collect or distribute to your creditors .
In contrast, if you own something that is not exempt, and the trustee decides that it is worth liquidating and using the proceeds to pay a portion of your debts, then your case is an “asset case.”
The Quick “No Asset” and the Drawn Out “Asset” Case
Generally, a “no asset case” is simpler and quicker than an “asset case” because it avoids the asset liquidation and distribution to creditors process.
A simple “no asset” case can be completed in about three to four months after it is filed (assuming no other complications arise). An asset case can take a year or more.
The Potential Benefits of an “Asset” Case
If you have an asset case, that can be turned to your advantages. Two situations come to mind.
First, you may decide to close down your business and file a bankruptcy immediately in order to hand over to the trustee the headaches of collecting and liquidating the assets and paying your business creditors . If you’ve been fighting for a long time to try to save your business, you avoid the added headache and expense of negotiating work-out terms with all the creditors.
Second, in the Chapter 7 process, certain debts, called priority debts, are paid first. General debts get paid afterwards to the extent there are available funds. More importantly, certain priority debts are not discharged by the bankruptcy. That means you still owe them after the bankruptcy is completed. Examples of priority debts that are not dischargeable include child and spousal support arrearages, and certain tax claims.
So, as a debtor, you want to pay off as much non-dischargeable debts as you can. To the extent you have non-exempt assets, the Trustee can use the proceeds of the sale of those assets to pay off some or all of your priority, non-dischargeable debts. Non priority debts (except for most student loans) are discharged regardless of whether they receive payment in the Chapter 7.
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