Posted by Kevin on January 28, 2018 under Bankruptcy Blog | 
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.
Posted by Kevin on May 10, 2017 under Bankruptcy Blog |
When you’d like to favor certain important debts over others, often Chapter 13 makes this possible.
Using the Bankruptcy Laws to Your Advantage
One of the basic principles of bankruptcy is that you usually can’t favor one debt over your other debts. However, under the Bankruptcy Code, certain creditors are recognized to be legally different. For example, secured creditors have rights over your property that you’ve given as collateral, rights that unsecured creditors don’t have. Also, bankruptcy does not discharge (write off) certain debts. These include child support, many types of taxes and many student loans, and certain other debts. These can’t be discharged while most debts can.
Chapter 13 requires that you treat certain debts differently- and that can be to your advantage.
Here are two good examples.
Catching up on Your Mortgage Arrearage
The law highly favors residential mortgage debts, especially your primary mortgage. Why? The policy reason is that these lenders should be protected in bankruptcy to lessen their risks. Arguably this encourages more investment in the residential mortgage capital markets which makes mortgages more readily available to homeowners.
So, if you were behind on your home mortgage and wanted to keep the home, you’d have to catch up. That is referred to in the Chapter 13 context as paying the mortgage arrearage. You can’t escape doing so just because the home is worth less than the debt (as you often can with a vehicle loan).
In a Chapter 13, you have up to 60 months to pay your mortgage arrearage. In New Jersey, those payments are made to the trustee while you make your regular mortgage payments going forward directly to the lender or servicer. As long as you make these payments, the automatic stay remains in effect and your mortgage lender cannot file a foreclosure. Moreover, the lender cannot demand payments that exceed 1/60 of the arrearage (assuming a 5 year plan) and cannot add late or other fees.
Child Support Arrearage
Another kind of debt that is highly favored in the law is child support. As a result, if you get behind on support payments, the collection procedures that can be used against you are extremely aggressive. In New Jersey, you can go to jail, have your driver’s license suspended or have a professional license suspended.
Chapter 7 provides no direct help if you owe back support. The “automatic stay” that protects you from other creditors does not even apply to support debt under Chapter 7. This means that the aggressive collections can just continue; the bankruptcy filing has no effect on it.
But a Chapter 13 is very different. The “automatic stay” does protect you and your property from collection of the support arrearage. You ARE protected from support collections, as long as you follow some strict rules. After the Chapter 13 filing, you must pay ongoing regular support payments, and your Chapter 13 plan payments. In addition, you have to pay off the entire support arrearage before completing the case (up to 60 months).
Posted by Kevin on September 10, 2012 under Bankruptcy Blog |
Bankruptcy protects your paycheck because it’s more powerful than a creditor’s garnishment court order
A garnishment is effectively a court order which tells your employer to pay a portion of your paycheck to the creditor instead of to you. Except in rare circumstances, a creditor can’t get that garnishment order without first suing you and getting a judgment saying that you owe the debt. A judgment is the court’s decision that you do indeed owe the debt, how much you owe, and the amount of any additional costs. A judgment authorizes a creditor to use a variety of powerful ways to get money or property out of you to pay the debt, often (but not always) including through wage garnishment.
Bankruptcy stops wage garnishments at four stages of the process:
- before the creditor files a lawsuit, by stopping that lawsuit from being filed in the first place
- very shortly after a lawsuit is filed, by preventing that lawsuit from turning into a judgment
- after a judgment is entered, by not allowing the creditor to get a garnishment order
- after a garnishment order is signed by the court where the judgment was entered, by trumping the garnishment court order with a more powerful bankruptcy “automatic stay”
So your bankruptcy prevents most garnishments from happening. It stops future hits on your paycheck from a “continuous garnishment,” in which there is one garnishment order requiring money to be taken out of your paycheck until the debt is paid. And it also stops new garnishments on an old judgment, for example, when a creditor finds out about your new employer.
Bankruptcy Stops Some Wage Garnishments Only Temporarily
In preventing upcoming wage garnishments, bankruptcy USUALLY does so permanently. This happens when a debt is discharged (legally written off) in the bankruptcy case, as most debts are. Once a debt is discharged, under Section 524(a)(2) of the Bankruptcy Code an injunction is imposed against the collection of that debt every again, by any means including garnishment. So in those situations the bankruptcy filing stops the garnishment, forever.
So when are garnishments NOT stopped permanently? Garnishments are just temporarily stopped by your bankruptcy filing if the debt is NOT being discharged in the Chapter 7 case—such as certain taxes, most student loans, and a few other kinds of debts. The automatic stay preventing the garnishment is in effect only from the time the case is filed until the entry of the discharge about three months later. So, for example, if the IRS was garnishing your wages before the filing of your bankruptcy to collect on a tax that is not being discharged, the IRS can resume doing so after the discharge is entered (unless in the meantime arrangements are made with the IRS to make monthly payments on that debt, which hopefully you would be able to do after the discharge of your other debts).
Bankruptcy Does Not at All Stop A Few Rare Kinds of Wage Garnishments
If you are filing a Chapter 7 case, the automatic stay does not protect you from wage garnishment to pay child and spousal support obligations, for either current or back support. This means that an ongoing garnishment for support will not be stopped by a bankruptcy filing. And if there had been no garnishment earlier, those garnishments could actually start during your bankruptcy case.
Fortunately, Chapter 13 DOES stop garnishments for support, and provides a way to catch up on back support while under the protection of the bankruptcy court.
Present and Past Wage Garnishments
We’ve covered the effect of bankruptcy on future garnishments, including those that would have gone into effect right after the bankruptcy filing. But what about garnishment orders that go into effect just before filing bankruptcy? For example, what if you’re racing to file bankruptcy after a judgment is entered, but your bankruptcy is filed and the automatic stay goes into effect a day or two after the garnishment order is signed but before any money comes out of your paycheck? And how about after the money has been paid by your employer to the creditor, days or even weeks before your bankruptcy filing? Under what circumstance could you possibly get that money back? The next two blogs will get into these questions about present and past garnishments.
Posted by Kevin on June 11, 2012 under Bankruptcy Blog |
Support is Not Dischargeable, If It’s Really Support
If you owe a debt “in the nature of” child or spousal support, that debt cannot be discharged (legally written-off) in either a Chapter 7 or Chapter 13 case.
The point of the “in the nature of” language is that an obligation could be called support in a divorce decree or court order, and yet not actually be “in the nature of” support for purposes of bankruptcy. Or, for that matter, the obligation may not be labelled as support in the decree or order, but could be found to be support. The bankruptcy court makes the call whether an obligation is “in the nature of” support, and it looks beyond the label given to a debt in the separation or divorce documents. Practically speaking, this often times leads to litigation within bankruptcy proceeding- either a motion or an adversary proceeding.
So what’s an example of a debt which is not really “in the nature” of support? Well, how about a personal loan provided to the two spouses during their marriage by one of the spouse’s parents. In the subsequent divorce, the divorce decree obligated the other spouse to repay that loan by paying making payments of “spousal support” until that loan was paid off. In that obligated spouse’s subsequent bankruptcy case, that obligation for so-called “spousal support” would likely be seen as one not “in the nature of” support. Instead the court could well see that obligation for what it really is: an obligation for one spouse to pay a marital debt, not one actually to pay spousal support.
Any Possible Benefit from Chapter 7?
No usually. The best thing that a “straight” Chapter 7 can do to help with your support obligations is to discharge your other debts so that you can better afford to pay your support.
Beyond that there is one other relatively rare situation that can help if you owe back support payments—an “asset” Chapter 7 case.
In most Chapter 7 cases, all of the assets that the debtors own are protected by exemptions, so the debtors keep all their assets. Nothing has to be given to the trustee. Since the “bankruptcy estate” contains nothing, it’s a “no asset” case.
But if all of your assets are not exempt, then the trustee takes possession of the non-exempt assets and sells them. From the proceeds of the sale, the first priority, after payment of trustee fees, are back support payments. They get paid, in full, before other creditors get paid (like credit cards). So if you owe back child or spousal support in an asset case, some or all of it could be paid this way.
Any Possible Benefit from Chapter 13?
Although a Chapter 13 case does not discharge support obligations any better than a Chapter 7 one, it still gives you a potentially huge advantage: Chapter 13 stops collection activity for back support obligations. Chapter 7 does not. This is significant because support collection can be extremely aggressive. In many states, the debtor can lose his or her driver’s license.
In addition to stopping the collection effort, Chapter 13 provides you a handy mechanism to pay off that back support, usually allowing you to pay that debt ahead of most or all other debts. That usually translate into lower payments to your other creditors; in effect allowing you to pay your back support on the backs of other creditors
