Posted by Kevin on August 6, 2019 under Bankruptcy Blog | 
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.
Posted by Kevin on July 2, 2017 under Bankruptcy Blog |
Here are some of the other main advantages of Chapter 13:
1. You can keep your possessions that are not protected by property “exemptions,” preventing a Chapter 7 trustee from taking them from you. Thus you retain much more control over the process of saving your assets, avoiding the unknowns of negotiating payment terms with a Chapter 7 trustee in order to keep your non-exempt possessions. Also, in a Chapter 13 case, you have 3 to 5 years to pay to protect such possessions, instead of the few months that Chapter 7 trustees generally allow.
2. Similarly, if you fell behind in payments on your home’s first mortgage, you have the length of your plan—the same 3 to 5 years–to catch up. That’s in contrast to the few months of payments that a mortgage lender would generally allow if you negotiated directly with it after filing a Chapter 7 case.
3. You may be able to “strip” a second (or third) mortgage from your home’s title, and avoid paying all or most of that mortgage. This can happen if the value of your home is less than the balance of your first mortgage. Mortgage “stripping” may save you hundreds of dollars per month. This is completely unavailable in a Chapter 7 case.
4. You may be eligible for “cramdown” of your vehicle loan. If you purchased and financed your vehicle more than two and a half years before filing your Chapter 13 case, and the vehicle is worth less than the balance on the loan, your monthly payments and the total amount you pay for your vehicle can be significantly reduced. In contrast, in a Chapter 7 straight bankruptcy case you are usually almost always stuck with the monthly payment and loan balance dictated by the vehicle loan contract.
5. In that same situation, if you are behind on the vehicle loan payments you don’t have to catch up those back payments over a few months. In a Chapter 7 case, almost always you must quickly pay off any arrearage if you want to keep the vehicle.
6. If you owe an ex-spouse non-support obligations, you can discharge (write-off) them under Chapter 13—not under Chapter 7. Non-support obligations include requirements in a divorce decree to pay off a joint marital debt or to pay the ex-spouse in return for getting more of the marital property. Discharging such debts can make a huge difference, often making Chapter 13 well worthwhile.
7. If you have any student loans, under Chapter 13, you can apply for an income driven repayment plan for federal loans and reduce payment on private loans. In most cases, you are not going to discharge those loans, but you will be able to make affordable payments while in the Chapter 13 plan. Also, you can use the payment history in Chapter 13 as a basis to qualify for a “hardship discharge” of your student loans. For more information on student loan debt, please join us on www.studentdebtnj.com.
People often assume they need and want a regular Chapter 7 bankruptcy, and it’s often exactly what they do need. But the above short list gives you some idea of the benefits of Chapter 13 that may make it a much better option. That’s one of the reasons you should talk with an experienced bankruptcy attorney, and do so with an open mind. That’s because sometimes Chapter 13 can give you a huge unexpected advantage, or a series of smaller advantages, which may swing your decision in that direction.
Posted by Kevin on March 29, 2017 under Bankruptcy Blog |
Many people believe that bankruptcy can’t write off any income taxes. In fact, it is not uncommon for non-bankruptcy attorneys to lump taxes in with other priority debts like alimony and child support payments (which are not dischargeable) and student loans (which are dischargeable in bankruptcy upon a showing of undue hardship).
Through the next few blog posts, you’ll learn what taxes can be discharged and what can’t. The fact is that bankruptcy can discharge taxes of many types and in many situations. Sometimes ALL of a taxpayer’s taxes can be discharged, or most of them. But there ARE significant limitations, which I will explain carefully in those blogs.
Besides the possibility that you may be able to discharge some or all of your taxes, bankruptcy can also:
1. Stop tax authorities from garnishing your wages and bank accounts, and levying on (seizing) your personal and business assets.
2. Prevent post petition accrual of interest and penalties in certain situations.
3. If paid through a plan, limits your payments to what is affordable as opposed to what the taxing authority demands.
4. Eliminate other debts so that money is available to pay the taxing authority.
Overall, bankruptcy gives you unique leverage against the IRS and/or your state or local tax authority. It gives you a lot more control over a very powerful class of creditors. Your tax problems are resolved not piecemeal but rather as part of your entire financial package. So you don’t find yourself focusing on your taxes while worrying about the rest of your creditors.
The laws relating to taxes and bankruptcy are somewhat complex and not easily handled by “do it your selfers”. It is recommended that a prospective debtor seek out an attorney with experience in taxes and bankruptcy.
Note I mentioned students loans above. If that is your issue, you can contact me on this website or on http://studentdebtnj.com
Posted by Kevin on June 29, 2013 under Bankruptcy Blog |
This $36 billion is owed by 2 million older Americans. Garnishment of their Social Security benefits to pay these student loans has skyrocketed.
Here are the facts:
- You’ve likely heard that the total amount of student loan debt has surged beyond the amount of credit card and auto loan debt. The actual numbers as of a few months ago are:
- Credit cards: $693 billion
- Auto loans: $730 billion
- Student loans: $870 billion
- In addition to the student loan debt owed by 60+ year olds, nearly $100 billion is owed by 4.4 million 50 to 59 year olds, and $143 billion by 5.5 million 40-49 year olds. That’s nearly 12 million Americans 40 or older who still owe on student loans.
- Among all Americans who owe student loans nearly one-third of them are 40 or older. More than one-sixth are 50 or older.
- Through the Debt Collection Improvement Act of 1996, Congress centralized delinquent debt collection functions at the Department of Treasury, and authorized it to garnish borrowers’ Social Security payments to collect on federally insured student loans. (See p. 4 of this PDF of the Act, or 11 United States Code Section 3716(c)(3)(A)).
- At the heart of this Act is the following language:
“Notwithstanding any other provision of law… all payments due to an individual under… the Social Security Act… shall be subject to an offset under this section.”
- In 2000 six student loan borrowers had their Social Security payments garnished, in 2007 that number had shot up to 60,000 borrowers, and by last year 115,000 borrowers had their Social Security payments garnished.
- The garnishments cannot exceed 15% of the Social Security payment, and must leave the borrower with at least $750 per monthly check.
Note: much of this information is from a recent report by the Federal Reserve Bank of New York, and the U.S. Treasury Department’s latest annual Report to the Congress on U.S. Government Receivables and Debt Collection Activities of Federal Agencies.
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 15, 2012 under Bankruptcy Blog |
Student loans are not just burdening recent graduates. They’re now directly hurting people you wouldn’t expect. And dragging down the whole economy.
Recent college graduates are clearly hurting in this economy as they come out of school and enter the job market. The national unemployment rate has come down from the Great Recession high of 10.0% in October 2009 to 8.2% in May 2012. But it’s the persistence of extraordinarily high unemployment that is hurting young graduates. Only one other time since the Great Depression of the 1930s had the unemployment rate hit 10%, during the recession of 1981-82. But then, like in most other modern recessions, a strong recovery reduced the unemployment rate quite quickly, in that case down to 7.2% in less than two years. In contrast the current recent graduates are trying to claw their way into their first career jobs in the midst of a “jobless recovery.”
And they are forced to do so saddled under the most student loan debt ever. You’ve probably heard the news of the past few months that total student loan debt now exceeds $1 trillion and is more than the nation’s total credit card debt. Realize that most of these graduates started college before the Great Recession hit, many heading into careers that looked relatively sensible back then but are now disaster areas. Public school teachers, anyone?
And many others made the tough decision to stay in school to ride out the recession, maybe shifting into more reliable fields, only to be confronted with one of the most anemic recoveries in modern history.
But it’s not just these twenty-something year olds who are hurting. Two other populations are being hugely impacted.
First, middle-aged students have gone back to school in a scramble to shift with the rapidly changing economy to more marketable careers. Their gamble has included taking on a huge amount of student loan debt. As the title of this Reuters article says, “Middle-aged borrowers [are] piling on student debt.” It states that in the last three years, average student loan debt has gone up 47% for the 35-to-49 year old age group, more than for any other group.
Second, just as dramatic, parents of students are taking on more and more student loan debt on behalf of their children. According to this Bloomberg article, “Loans to parents have jumped 75 percent since the 2005-2006 academic year… . An estimated 17 percent of parents whose children graduated in 2010 took out loans, up from 5.6 percent in 1992- 1993.”
Hopefully the retrained, re-schooled middle-aged workers will find work that justifies taking out the loans. After all, the labor force has to adjust to the changing realities of the labor market, and if it does so efficiently the whole economy benefits.
And hopefully the parents’ investment in their children’s education will also be worthwhile. Their kids’ increased earning power over their lifetimes may well make it so. And you’d think that if a college student knows that his or her parents are mortgaging their home or their retirement, that student would be motivated to make good use of the education!
A title of a recent report by the National Association of Consumer Bankruptcy Attorneys asks the question squarely: “The Student Loan ‘Debt Bomb’: America’s Next Mortgage-Style Economic Crisis?
I’m a bankruptcy attorney who looks across my desk just about every day into the faces of clients whose investment in higher education did not pan out. I know that in my line of work I don’t tend to hear the success stories, but from where I’m sitting it feels like we’re heading in a dangerous direction.
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 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.
