Posted by Kevin on April 20, 2013 under Bankruptcy Blog | 
Bankruptcy court is a relatively efficient place to determine whether or not you must pay a debt which the creditor says can’t be discharged.
One of the realities about filing a consumer bankruptcy case is that your case can get much more challenging if you have a very aggressive creditor. Most creditors take your bankruptcy filing in stride as a normal part of their business, figuring that you’re doing it for a sensible reason. But some creditors take it personally and react with more anger than good sense—often because they have some personal connection to you like an ex-spouse or former business partner. Or other more conventional creditors may honestly believe that they have grounds to prevent their debt from being discharged.
This blog, and the next one, are about what happens when there is such a creditor. The topic here is is not about creditors with rights to collateral, where the issues focus on what will happen to the collateral. It’s not about debts which will clearly not be discharged, like recent income taxes or child support obligations or most student loans. Rather this is about debts that would normally be discharged unless the creditor can prove that the debt arose of some bad behavior by you, usually involving some sort of fraud, theft, drunk driving, or such. Not just any bad behavior will do; it has to be one of a specific list that is in Section 523 of the Bankruptcy Code.
Creditors Have to Put Up or Shut Up
Before filing bankruptcy, you may be told by a creditor’s representative or collection agent that a debt can’t be discharged in bankruptcy or that they will fight you if you file bankruptcy. Most of the time they’re bluffing you. But for sure tell your attorney about the threat so that he or she can determine whether it has any merit. If it doesn’t, that will avoid unnecessary worry for you. In the unlikely event the threat does have merit, that will help your attorney prepare for a challenge by the creditor if it comes.
Even if a challenge has legal merit, a creditor may not pursue it for practical reasons, mostly to avoid putting out more money—in filing fees and attorney fees—to try to prove that you can’t discharge the debt, only to risk losing that battle and wasting its money. At least in theory the law has a “presumption” that your debts will be discharged, so the burden is on the creditor to show that a debt should not be.
And you don’t have to sit around wondering for long whether or not any creditor will raise a challenge. Except in very rare circumstances (such as forgetting to list the creditor in the bankruptcy documents), any creditor that has any objections to the discharge of its debt has only 60 days from your hearing with the trustee to formally file an objection or forever lose its opportunity to do so. Since that meeting (also called the “meeting of creditors” or “341 hearing”) usually happens about a month after your case is filed, this means that within about 3 months after filing you will know.
The “Adversary Proceeding”
The creditor may tell your attorney in advance about an intended challenge, usually in an effort to get you to settle the matter by agreeing to pay part or all of the debt. But much of the time the creditor just files a formal complaint at the bankruptcy court. This begins what is in effect a mini-law suit, called an adversary proceeding, focusing only on whether the creditor can prove the facts that the law requires for the debt to be excluded from discharge. This issue is usually NOT on whether you owe the debt in the first place—that’s usually assumed and admitted. Rather the issue would be whether, for example, you incurred the debt by falsifying a credit application, by never intending to pay it through bounced checks, by coercing a relative to change their will on your behalf… behavior of this sort.
Please come back to the next blog in a couple days for the rest of the story about what happens in these adversary proceedings.
Posted by Kevin on April 14, 2013 under Bankruptcy Blog |
Three more very practical ways that bankruptcy works to let you take control of your debts, even those that can’t be written off.
A few blogs ago I gave six reasons why it’s worth looking into bankruptcy even when you can’t discharge (write off) one or more of your debts. Today here are the final three of those reasons, each one paired with a concrete example illustrating it.
Reason #4: Taking control over the amount of the monthly payments.
The taxing authorities, support enforcement agencies, and student loan creditors have extraordinary power to take your money and your assets if you fall behind in paying them. Because of that tremendous leverage, you normally have no choice but to play by their rules about how much to pay them each month. Chapter 13 largely throws their rules out the window.
Let’s say you owe $15,000 to the IRS—including interest and penalties—from the 2010 and 2011 tax years, resulting from a business that failed. You’ve now got a steady job but one that gives you very little to pay the IRS after taking care of your very basic living expenses. The IRS is requiring you to pay that debt, plus ongoing interest and penalties, within 3 years. And it calculates the amount you must pay it monthly without any regard for your other debts, or for your actual living expenses. Even if you did not have unexpected expenses during those 3 years, paying the required amount would be extremely difficult. But if your vehicle needed a major repair or you had a medical problem, keeping up those payments would become absolutely impossible. But the IRS gives you no choice.
In a Chapter 13 case, on the other hand, the repayment period would stretch out to as long as five years, which lowers the monthly payment amount. And instead of a rigid mandatory monthly payment going to the IRS, how it is paid in Chapter 13 is much more flexible. For example, if in your situation money was very tight now but would loosen up down the line—for example, after paying off a vehicle loan—you would likely be allowed to make very low or even no payments to the IRS at the beginning, as long as its debt was paid in full by the end. Also, you would be allowed to budget for vehicle maintenance and repairs, and medical costs, and other reasonable expenses, usually much more than the IRS would allow. And if you had unexpected vehicle, medical, or other necessary expenses beyond their budgeted amounts, Chapter 13 has a mechanism for adjusting the original payment schedule. Throughout all this, you’d be protected from the IRS.
Reason #5: Stopping the addition of interest, penalties, and other costs.
Under the above facts, if you were not in a Chapter 13 case, the IRS would be continuously adding interest and penalties. So that much less of your monthly payment goes to reduce the $15,000 owed, significantly increasing the amount you need to pay each month to take care of the whole debt in the required 3 years.
In Chapter 13, in contrast, unless the IRS has imposed a tax lien, no additional interest is added from the minute the case is filed. No additional penalties get added. So not only do you have more time to pay off the tax debt, and much more flexibility, you have also have significantly less to pay before you finish off that debt.
Reason #6: Focusing on paying off the debt that you can’t discharge by discharging those you can.
This may be obvious but can’t be overemphasized: often the most important and direct benefit of bankruptcy is its ability to clear away most of your debt burden so that you can put your financial energies into the one that remain.
Back to our example of the $15,000 IRS debt, let’s say the person also owes $20,000 in credit cards, $5,000 in medical bills, and a $6,000 deficiency balance on a repossessed vehicle. Discharging these other debts would both free up some of your money for the IRS and avoid the risk that those other creditors could jeopardize your payments to the IRS. Entering into a mandatory monthly payment arrangement with the IRS when at any moment you could be hit with another creditor’s lawsuit and garnishment is a recipe for failure.
Instead, a Chapter 7 case would very likely discharge all of the credit card, medical and old vehicle loan debts. With then gone you would have a more sensible chance getting through an IRS payment arrangement.
In a Chapter 13 case, you may be required to pay a portion of the credit card, medical and vehicle debts, but in return you get the benefits of getting long-term protection from the IRS, a freeze on interest and penalties, and more flexible payments.
So whether Chapter 7 or Chapter 13 is better for you depends on the facts of your case. Either way, you would pay less or nothing to your other creditors so that you could take care of the IRS. Either way, you would much more likely succeed in becoming tax free and debt free, and would get there much quicker.
Posted by Kevin on under Bankruptcy Blog |
The last blog gave 6 reasons why it’s worth looking into bankruptcy even if you know that you can’t discharge (write off) one or more of your most important debts. Today here are concrete examples how the first three of those could work for you.
The first two reasons we’ll cover together. First, sometime debts which you might think can’t be discharged actually can be, and second, some debts that can’t be discharged now may be able to be in the near future.
Let’s say you currently owe $10,000 in federal income tax for the 2008 tax year. You filed that tax return on October 15, 2009 after getting an extension. The IRS assessed the tax and you’ve been making monthly payments to the IRS on a payment plan, but because of that you did not make adequate tax withholdings or quarterly estimated payments for 2011. You know that once you file your 2011 tax returns (by October 15, 2012, because you got an extension) you’re going to be in trouble because you will owe a lot for that year as well. You know the IRS will cancel the payment plan for 2008 because of your failure to keep current on your ongoing tax obligations. You’re pedaling as fast as you can, but October 15 is less than two months away and you don’t know what to do. You are quite certain that the $10,000 tax debt cannot be discharged in bankruptcy.
You’d be right about that… but only for the moment. Because under these facts that 2008 tax debt could very likely be discharged through either a Chapter 7 or 13 bankruptcy case filed AFTER October 15, 2012. (Whether you’d file a Chapter 7 or 13 would depend on other factors, including how big your 2011 and anticipated 2012 tax debts will be.) Instead of being in a seemingly impossible situation, you would avoid paying all or most of that $10,000—plus lots of additional interest and penalties that you would have been required to pay. Instead you would be more than $10,000 ahead on paying off the 2011 and 2012 taxes!
Now here’s an example where bankruptcy can permanently solve an aggressive collection problem.
Change the facts above to make that $10,000 debt one owed for the 2009 tax year instead of 2008. Since that tax return was also filed with an extension to October 15, 2010, that $10,000 would not be dischargeable until after October 15, 2013. But in this example you’ve already defaulted on your monthly payment agreement. So you are appropriately expecting the IRS to file a tax lien on all of your personal property and on your home, and to start levying on (garnishing) your financial accounts, and on your paycheck if you’re employed or on your customers/clients if you’re self-employed.
With all that the IRS can do to you, you can’t wait until October of next year to discharge that $10,000. But if you filed a Chapter 13 case now the IRS would not be able to take any of the above aggressive collection actions against you. You would have to pay the $10,000 (and any taxes owed for 2010 and 2011) but you would have as long as 5 years to do so. And most importantly, throughout that time you’d be protected from any future IRS collection action on any of those taxes, as long as you complied with the Chapter 13 rules.
As for the 2012 tax year, you would likely be given the opportunity to pay extra withholdings or estimated payments during the rest of this year, which you would be able to afford because of temporarily paying that much less into your Chapter 13 plan.
So instead of being hopelessly behind and deathly scared about everything the IRS is about to do to you, within a few days you could be on a financially sensible path to being caught up with the IRS. And then within three to five years you’d be tax debt free, AND debt free.
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 July 6, 2012 under Bankruptcy Blog |
Background:
- A creditor which has rights to collateral is called a “secured creditor.” Your obligation to pay what you owe to this creditor is secured by rights it has to take possession and ownership of the collateral if you don’t make your payments on the debt.
- In bankruptcy, secured creditors have a lot more leverage against you because of the collateral than do creditors without any collateral—“unsecured creditors.”
- If you want to keep the collateral, Chapter 7 is sometimes is your best choice, but in many circumstances Chapter 13 can give you more options.
- Secured debts in which the collateral is your home or your vehicle are governed by special rules because of how important those kinds of collateral are to most people.
- But you will not find many blogs talking about secured debts where the collateral is something other than your home or vehicle. The main secured debts of this type are probably furniture and appliance purchases, money loans secured by your own personal assets, and business loans secured by business and/or personal assets.
Cramdown:
- This tool applies only to Chapter 13—it can’t be done in Chapter 7.
- If the collateral securing a secured debt is worth less than the balance on that debt, then you may be able to divide that debt into two parts: the secured part—the amount of the debt up to the value of the collateral, and the unsecured part—the rest of the debt. An example will make that clear. Let’s say you owed $1,000 on a refrigerator, in which the purchase contract gave the creditor the right to repossess that refrigerator if you didn’t make the agreed payments. If the present value of that refrigerator is $600, then the secured portion of that debt would be $600, and the remaining $400 of that debt would the unsecured portion.
- In a Chapter 13 “cramdown” you pay not the total debt, but only the secured part of the debt. You pay the unsecured part of the debt only at the percentage that all the rest of your regular unsecured creditors are paid. That is usually less than 100% and can sometimes be a low as 0%. In the above example, the $1,000 total refrigerator debt is crammed down to $600, and the remaining $400 part of the debt is lumped in with the rest of your unsecured creditors. So if in your Chapter 13 plan your unsecured creditors are receiving 10%, then you would pay only the $600 secured portion, the remaining unsecured portion would get $40 spread out over the term of the plan, and would be discharged (written off) at the end of your Chapter 13 case.
THE cramdown rule with collateral other than your home or vehicle:
- “[I]f the debt was incurred during the 1-year period preceding [the bankruptcy] filing” then you cannot do a cramdown on collateral that is neither your home nor your vehicle. See the last sentence of Section 1325(a) of the Bankruptcy Code (tucked in right after subsection (a)(9)). This means that if the debt is any older than 1 year, you CAN do a cramdown.
So, if you have a debt, more than 1 year old, secured by something other than your home or vehicle(s), in which the collateral is worth less than the debt, you can cram down the debt to the value of the collateral. If so, then because this can only be done under Chapter 13, that would be one factor in favor of filing under Chapter 13 instead of Chapter 7. Talk to your attorney to see if this applies to you, and to find out all the other Chapter 7 vs. Chapter 13 factors to weigh in your situation.
Posted by Kevin on June 29, 2012 under Bankruptcy Blog |
A previous blog focused on ways in which Chapter 7 and Chapter 13 bankruptcy each make it possible for you to keep your vehicle by keeping your vehicle lender satisfied. But to be very practical, today let’s hone in on one very common scenario: you’ve fallen behind on your vehicle loan, but need to keep that vehicle. What are your options?
Saved by the Automatic Stay
As you probably already feel in your gut, you’ve got to accept right away that you are in a very precarious situation. Vehicle loans are very dangerous because of how quickly the collateral—your car or truck—can be repossessed. Realistically, most repossessions do not happen until you’re about 2 months late. But that depends on your payment history, the overall aggressiveness of the creditor, and, frankly, how the repo manager happens to be feeling that day. If you’re not current, you’re in danger.
Once a repossession happens, that does not always mean that your vehicle is gone for good. But in many situations that IS the practical result. To get a vehicle back after a repo usually takes serious money. Money you don’t likely have hanging around if you’re behind on your car payments.
And once the repo happens, thing’s often just get worse—your vehicle is sold at an auction, and you often end up owing thousands of dollars for the “deficiency balance,” the difference between what the vehicle was auctioned off for and the amount you owed on the loan (plus repo and sale costs). Next thing you know, you’re being sued for those thousands of dollars.
All that is preventable, IF you file either a Chapter 7 or Chapter 13 bankruptcy BEFORE the repossession. The “automatic stay”— a legal injunction against repossession—goes into effect instantaneously upon the filing of bankruptcy. Even if the repo man is already looking for your vehicle to repo, once you file that gets you off his list. At least for the moment.
Dealing with Missed Payments under Chapter 7
As stated in the last blog, most vehicle lenders play a “take it or leave it” game if you file a Chapter 7 case. If you want to keep the vehicle, you must bring the loan current quickly—usually within about two months after filing. Unless your lender is one of the relatively few that are more flexible, you need to figure out if not paying your other creditors is going to free up enough cash to catch up on your missed payments within that short time. If not, the lender will have the right to repossess your vehicle if you are not current the minute the Chapter 7 case is completed, usually about 3 months after it is filed. In fact, you may have even less time if the lender asks the bankruptcy court for permission to repossess earlier.
Dealing with Missed Payments under Chapter 13
You have much more flexibility about missed payments under Chapter 13. In fact, you do not need to catch up on them at all.
There are two scenarios, alluded to in the last blog.
If your vehicle is worth at least as much as your loan balance OR if you entered into your vehicle loan two and a half years or less before filing the case, than you will have to pay the entire loan off within the 3-to-5-year Chapter 13 plan period. However, you can reduce interest payments to what is known as the Till rate. That is prime plus a factor for the risk involved in your situation. For all intents and purposes, while interest rates stay low, you should be able to reduce interest to 4.5-5%. Depending on the amount of the loan balance, that can mean a reduction in monthly payments.
If your vehicle is worth less than your loan balance AND you entered into your vehicle loan more than two and a half years before filing the case, then you can reduce the total amount to be paid down to the value of the vehicle. With this so-called “cramdown,” you still must pay that reduced amount within the life of the Chapter 13 plan. And you can reduce interest to the Till rate. Now, you may need to pay a portion of the remaining balance, primarily based on whether you have extra money in your budget to do so. But the savings in terms of both the monthly payments and the total amount to be paid are often huge.
Conclusion
Bankruptcy stops your vehicle from being repossessed, and gives you options for dealing with previously missed payments. Chapter 7 may work if you can pay off the entire arrearage fast enough. Otherwise you may need the extra help Chapter 13 provides. Or you might want to file Chapter 13 to take advantage of the “cramdown” option and reducing interest to the Till rate.
Posted by Kevin on June 27, 2012 under Bankruptcy Blog |
Under Chapter 7, you can pay your vehicle loan mostly by getting rid of all or most of your other debts. Under Chapter 13, you can pay your vehicle loan ahead of most of your other creditors.
Bankruptcy law is about balancing the rights of debtors and creditors. When you file bankruptcy you gain some leverage against most of your creditors. But exactly how much leverage depends on the kind of debt. With a vehicle loan, you get much less leverage than with some other types of debts because the lender has a right to its collateral–your car or truck. But if you want to keep your vehicle (and you need a vehicle in Northern New Jersey), you may be able to use the lender’s rights over your collateral to your advantage.
Let’s see how this works under Chapter 7 and then under Chapter 13.
Favoring your vehicle loan in a Chapter 7 “straight bankruptcy”
Between you and the vehicle lender, your leverage is that you have the right to simply surrender your vehicle to the creditor and pay nothing. The bankruptcy discharges (writes off) any remaining debt. Usually the lender does not get paid enough from selling the vehicle to cover the full balance on the debt.
This means that sometimes we can use the threat of surrender to improve the vehicle loan’s terms, maybe even reduce the balance to an amount closer to the current fair market value of the vehicle.
But unfortunately, many major vehicle lenders don’t see it that way. They made a decision at some point that they make more money by requiring all their Chapter 7 customers to pay the full balance on the vehicle loans, and then take losses on those who aren’t willing to do that and instead surrender their vehicles. But it may be worth a try.
Favoring your vehicle loan in a Chapter 13 “payment plan”
Between you and the vehicle lender, your leverage is both lesser and greater under Chapter 13 than under Chapter 7.
You have less leverage in threatening surrender if your Chapter 13 plan is paying anything to your unsecured creditors. That’s because the vehicle lender would recoup from you at least some of its losses upon surrender, instead of none.
And if your vehicle loan is two and a half years old or less, if you want to keep the vehicle you must pay the full balance of the loan, regardless of the value of the vehicle compared to the loan balance.
But you have more leverage in two ways. With any vehicle loan, including those two and a half years old or less, you do not have to cure any arrearage, and can change the monthly payment, as long as the balance is paid in full by the end of the case.
And if the loan is more than two and a half years old, you can do a “cramdown”—reduce the amount you pay to the fair market value of the vehicle, plus whatever percentage you’re paying to the pool of unsecured debt, if any.
Clearly, Chapter 13 gives the debtor more leverage, if not more options, when it comes to a vehicle.
Posted by Kevin on June 22, 2012 under Bankruptcy Blog |
Three ways bankruptcy can help: 1) write off debts to focus on defense costs, 2) pay only the most important debts and expenses, and 3) reduce chance of related civil liability.
As discussed in a previous blog, criminal fines, fees and restitution are almost never discharged in any kind of bankruptcy case. And yet if you’re facing a serious criminal charge, or have already been convicted, bankruptcy can still be hugely helpful.
If you’re charged with a crime, you need financial resources to pay for your legal defense. You need to be able to focus financially and emotionally on fighting the criminal charge. And then, if you do not win a complete acquittal, you have to figure out how you will pay whatever criminal fines, restitution, or other court and probation fees that the court orders as part of your criminal sentence. So you have to choose what your highest financial priorities are. Because of the grave potential consequences, that usually means paying for a defense attorney, and then paying whatever the criminal court requires of you. Bankruptcy can help in this by re-prioritizing your debts and expenses, and protecting you from your creditors.
1. Bankruptcy can help by writing off all or most of your debts so that you can focus both your attention and your finances on the criminal charge(s) or their aftermath.
Right after you’ve been charged with a crime, unless you indigent and financially qualify for a public defender, your highest priority must be to pay for your criminal attorney and any related costs of your defense. That may mean selling assets, and/or surrendering collateral to creditors, like a vehicle with high monthly payments. And you may need to stop paying all your creditors. Often the cleanest way to reduce your debt load is with a Chapter 7 bankruptcy. In the right circumstances it provides the financial relief you need.
After your criminal case is resolved, especially if you had to serve a jail sentence, you’ve probably had a gap in your income, or now have a job with lower income. You often have continuing financial obligations to the criminal justice system that you must absolutely pay because your release or probation is conditioned on you doing so. These can include restitution payments, probation/supervision fees, treatment costs, community service fees, and/or chemical and electronic monitoring charges. A bankruptcy can clean up your debts so you can pay these criminal fees and avoid re-incarceration. The last thing you need is some ancient creditor garnishing your wages or bank account so that you can’t meet your criminal obligations.
2. Bankruptcy can help you prioritize your debts and expenses so that you can keep paying the ones most important to the criminal conviction against you.
Sometimes the criminal court imposes other kinds of conditions on you which directly require you to keep current on certain of your debts or expenses, beyond the court and probation fees referred to above. Depending on the nature of your offense, you may be required to keep absolutely current on your child support payments, or file and pay income taxes on time, or always maintain vehicle insurance.
Also, your criminal sentence or terms of probation often require you to show up at certain scheduled events—to do your community service, attend probation meetings, or just maintain regular employment. All require reliable transportation. If you cannot make your vehicle payments or pay for vehicle insurance, or at least pay for public transportation, you will not be able to meet these conditions. A Chapter 7 or Chapter 13 bankruptcy may be the best way for you to be able to pay for these necessities.
3. Alleged criminal behavior often results in the threat of civil liability by the injured party. Filing bankruptcy might, under certain circumstances, dissuade that party from filing a lawsuit against you, or lead to a quicker settlement if a lawsuit has already been filed.
Bankruptcy law does make it difficult for you to discharge debts or claims that you may owe for personal injuries or financial damages resulting from certain kinds of allegedly criminal behavior. But, nevertheless, for the following practical reasons a bankruptcy may still help:
a. In a bankruptcy, you must present your financial circumstances in detail, in writing, under penalty of perjury. You are also questioned under oath about them, at least briefly, and potentially in depth. Although that may not sound like a lot of fun, taking the initiative to show that you have no assets may convince the other party—or may more importantly, his or her attorney—that pursuing you would not be financially worthwhile.
b. The other party has to jump through some relatively difficult hoops to establish that the debt or claim should survive beyond your bankruptcy case. Depending on the situation, this may dissuade him or her from spending lots of attorney fees on a difficult battle.
c. With certain kinds of alleged damages, the other party has a very short amount of time to decide whether to pursue you or not. Some may simply miss the quick deadline. Or it may encourage a quicker settlement.
Whether a bankruptcy filing will give you an advantage along these lines is a very delicate tactical question that needs to be very carefully discussed with and analyzed by your attorney. But it is certainly worth considering.
Posted by Kevin on June 20, 2012 under Bankruptcy Blog |
If you’ve heard otherwise you might actually be hearing correctly—especially about restitution—but most likely you’re reading or listening to information that’s now a couple decades outdated. For a long time criminal fines and restitution have not been able to be discharged under Chapter 7, BUT until the early 1990s criminal restitution COULD be discharged under Chapter 13. In fact, a 1990 United States Supreme Court opinion, Pennsylvania Dept. of Public Welfare v. Davenport, clearly stated that criminal restitution was dischargeable under Chapter 13, based on the language that Congress had used in the Bankruptcy Code. However, in direct reaction to that Supreme Court opinion, Congress quickly amended Chapter 13 to make clear that criminal restitution could not be discharged. A few years later Congress tightened up the law again, this time to say that criminal fines could not be discharged under Chapter 13 either. So ever since then the law about this has been quite clear.
But still, complications can arise.
Take the situation where the same conduct by a debtor can result in either civil or criminal liability, or both. Usually, you can figure out very quickly whether the fine is civil or criminal, dischargeable or not. Everybody’s favorite example is OJ Simpson. Remember he was acquitted of murder on the criminal side, but then was held liable for wrongful death in the civil lawsuit against him.
But every once in a while, whether an obligation is a criminal fine or instead a civil penalty might not be so clear. If you own an auto repair shop and the state water quality agency fines you for illegal disposal of waste fluids, that obligation may be a criminal or civil one.
Or in some rare cases under Chapter 13, even some obligations arising directly from a criminal court’s judgment might be considered not to be “restitution, or a criminal fine,” and so can be discharged. That’s because even though Congress tried to “fix” the problem tossed in its lap by the Supreme Court’s Davenport opinion referred to above, it utilized language that was not precise enough and offered a little wiggle room.
Here is real life illustration of this—although I must warn that this may or may not be the way our local bankruptcy courts would interpret the law. The case is worth mentioning to show how courts wrestle with—and can disagree about—these kinds of issues.
A guy named Joseph Elliott Ryan was convicted in Alaska of the federal crime of possession of an unregistered firearm. He did nearly 5 years of prison time and paid a $7,500 criminal fine. But his criminal conviction also included obligations to pay $750,000 in restitution and $83,420 for “costs of prosecution.” On appeal, this huge restitution obligation was overturned and eliminated. He then filed a Chapter 13 case in Idaho and included his remaining obligation for the “costs of prosecution.” When his Chapter 13 case was completed, he had paid less than $3,000 of that $83,420 obligation. But he asked the bankruptcy court to order that the remaining $80,000 or so be discharged. The court refused, saying that “costs of prosecution” are a “criminal fine” excluded from discharge under Chapter 13.
But the bankruptcy court was overturned on appeal, and so that $80,000 “costs of prosecution” obligation was discharged. The appellate court carefully analyzed the meaning of the term “criminal fine” as used in this context and elsewhere, and concluded that this term does not include “costs of prosecution.” It did not matter to the the appeals court that the “costs of prosecution” had been part of a criminal court’s criminal sentence. So Mr. Ryan did not have to pay any more or that criminal court obligation, and was completely debt-free.
To be clear, just about all criminal fines, fees, and restitution CANNOT be discharged under either Chapter 7 or 13. But as Mr. Ryan’s unusual case illustrates, there can still be limited exceptions. In his case, for less than 5 cents on the dollar, and as a result of some smart lawyering, he got a bankruptcy discharge of a criminal court obligation.
Posted by Kevin on June 18, 2012 under Bankruptcy Blog |
The federal government is making billions of dollars on student loans every year. So why double the interest rate on the loans next year? To boost those profits.
The federal government pays tons of money to run its student loan programs, right? The interest rate on those loans is doubling next year from 3.4% to 6.8% in order for the taxpayers not to need to subsidize student loans as much, right?
Not according to law professor Alan White, who says that “Congress’ dirty secret is that the government makes a huge annual profit on student loans.” In his latest blog on the highly respected blogsite, Credit Slips, he cites as his main source “the scrupulously nonpartisan Congressional Budget Office.” According to its data, “$37 billion will flow IN to [the U.S.] Treasury from student loans made this fiscal year at the 3.4% rate.” And that’s after accounting for about $1.5 billion to administer those loans. So the interest rate doubling dispute “is about whether to increase this annual profit next year.” The two parties “are arguing about how much of the federal deficit to plug with student loan interest money.” If the interest “rate will jump up to 6.8% for 2013 loans, [that would yield] another $30 to $40 billion return to Treasury.”
But wait a minute. How about all the money that is lost because of all the borrowers who can’t or don’t pay on their student loans? Prof. White acknowledges that many loans do go into default, but because student loan creditors have “supercreditor powers, especially wage garnishment and tax refund intercepts. . . [, t]here is no statute of limitations… , and even bankruptcy discharge is difficult. The $37 billion Treasury profit for [fiscal year] 2012 is after allowing for estimated credit losses in the $5 billion range.”
So how can there be such a huge amount of profit? “In two words, yield spread. …. Treasury can borrow money at 0.5% or less, and lends it to students at 3.4%. Administrative costs are well below 1%.”
The bottom line: $37 billion profit for taxpayers in 2012, and about twice as much as that in 2013 if the interest rate doubles.
I don’t know if this law professor is right. My head started spinning when trying to figure out the pages and pages of accounting tables in the Congressional Budget Office’s report. But even if he is right, is it such a bad thing for the federal government to be making a profit with its investment of taxpayer money on student loans? After all, we have a huge deficit hole to plug.
But it seems important when making tough choices to frame the issues honestly. It’s one thing to talk about doubling the student loan interest rate so that borrowers are then paying more of, or even all of, the taxpayers’ cost of those loans. It’s an entirely different story if we’re doubling the interest rate from a level where it’s already raking in billions of dollars in profits, making way beyond paying the taxpayers’ cost.
A study by the Brookings Institute concluded that the “United States spends 2.4 times as much on the elderly as on children, measured on a per capita basis, with the ratio rising to 7 to 1 if looking just at the federal budget.” Is it fair to add this additional deficit-paying burden on the younger generation?
Why do we bring up this issue in a bankruptcy blog? Simple. A vast majority of student loan debt is not dischargeable in bankruptcy. Given that college expense has outstripped the inflation rate for the last thirty years, it is no wonder that a college education at a private university costs upwards of $180,000 with poor job prospects in the current market. The salt on the wound is that young unemployed or underemployed college graduates will have the additional burden of paying off a six figure student loan. Congress and the President cannot let this happen or will they because of the cash cow that student loans afford them?
Posted by Kevin on June 13, 2012 under Bankruptcy Blog |
Every creditor has the right to challenge your ability to write off your debts in bankruptcy. But none of them likely will. Why not?
For most people filing bankruptcy, every debt they intend to discharge (write off) will in fact be discharged.
There are two categories of debts that are not discharged in bankruptcy. The first category includes those special ones that Congress has decided for policy reasons simply should not be subject to a bankruptcy discharge. Among the most common ones are spousal and child support, most student loans, and many tax obligations. Assuming you are represented by a competent bankruptcy attorney, you will know before your case is filed if any of your debts fall into this category.
The second category of debts includes those that are discharged UNLESS the creditor files a formal objection to the discharge. Any creditor can raise an objection. But creditors very seldom do, for these reasons:
1. Although any creditor can challenge your discharge of its debt, it can only win such a challenge if it can prove that you acted inappropriately in certain very specific ways. Proving inappropriate action is not easy and it can be costly. Many creditors first impulse is that they will fight the discharge. Then after they sit down with a lawyer and find out what it is going to cost and what the chances of success are, a vast majority of creditors are sensible enough to not throw the proverbial good money after bad chasing a hopeless cause.
2. On top of that, bankruptcy law discourages creditors from raising challenges in two ways:
a. Debts are presumed to be dischargeable—at least if they do not fit any of the special nondischargeable debts in the first category referred to above. So the creditor has the burden of proving that the debt is not dischargeable, and the debt is discharged if it fails to provide the necessary evidence to meet that burden.
b. The creditor risks being ordered to pay YOUR costs and attorney fees for defending a challenge if you defeat the challenge. This is an added disincentive for a creditor to push a challenge when it has weak facts against you.
However, there are two situations where a debtor may get challenged on her discharge:
1. In cases involving use of credit card for luxury purchases within 90 days of filing or obtaining cash advances within 70 days of filing, there is a presumption that the debtor is trying to defraud the creditor. Since this presumption makes it easier to prove the case, creditors will bring this type of action.
2. Also, you may have a creditor who is motivated less by economic good sense than by a desire to cause you trouble, say an ex-spouse or former business partner.
The best way to deal with these situations is, first, to be completely honest with your attorney in answering every question he or she asks you, whether during a meeting or when providing information in writing. Be thorough in your responses. And second, if you have ANY concerns along these lines, make a point of voicing your concerns, and do so early in the process. Particularly, if you wonder whether you’ve acted inappropriately with any of your creditors; or if you have any personal creditors who are carrying a grudge, discuss it with your attorney. It may be that your concerns are unfounded and that would be a relief. However, if your concerns are real, then it is better to prepare for opposition ahead of time.
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
Posted by Kevin on June 8, 2012 under Bankruptcy Blog |
What does it take to write-off a student loan in bankruptcy? An “undue hardship.” And that is a very tough standard to meet.
When the 1978 Code was enacted, you could discharge a student loan 5 years after the first payment was due or for undue hardship. By 1990, there was an outcry that the 5 year rule was too lenient. It was increased to 7 years. I remember that what would drive the judges crazy when, say, a medical student, usually during his or her residency, would file a Chapter 7 and wipe out $200,000 of student loan debt, and then afterward pull in the big bucks. Admittedly, this was egregious. By the mid-90’s, there was talk that the time period would be increased to 10 years. But Congress, through the Higher Education Amendments of 1998, decided to do away with the time element for discharge of student loans. The Bankruptcy Code incorporated this amendment. So, since 1998, undue hardship to the debtor and the debtor’s dependents is the only way to discharge a student loan.
Undue Hardship is not defined in the Code. That means that the bankruptcy courts were required to decide, on a case by case basis, what undue hardship means. There have been hundreds of decisions relating to what constitutes an undue hardship. Although there are some differences among regions of the country, the general consensus that to meet this “undue hardship” hurdle, you have to show that you meet three conditions:
1. Under your current income and expenses, if you were required to repay the student loan, you would be unable to maintain even a minimal standard of living.
2. This inability to maintain a minimal standard of living while repaying the student loan would likely stretch out over all or most of the loan repayment period.
3. You had made a meaningful effort at repaying the loan, or to qualify for appropriate forbearances, consolidations, and administrative payment-reduction programs.
The bottomline is that very few debtors will be able to get a student loan discharged. That means that even if you file bankruptcy, you will be required to pay off the student loan- no matter how long it takes. Moreover, unlike some debts in which the burden is on the creditor to challenge the discharge of the debt, with a student loan the burden is on the borrower to establish “undue hardship” during the bankruptcy case. Otherwise, no discharge and the debt survives your bankruptcy case. As we said in the opening- a very tough standard.
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 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.
