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Archive for the ‘creditor objection to discharge’ tag

Debts Not Written Off in Bankruptcy

February 18th, 2019 at 8:00 am

Most debts get written off—discharged—in bankruptcy. The only ones that aren’t are specifically listed in the Bankruptcy Code. 

 

Debts Covered by the Discharge

The basic rule is that all your debts get discharged in bankruptcy unless a particular debt fits a listed exception.

Focusing on Chapter 7 “straight bankruptcy,” you will likely receive an Order of Discharge within about 4 months of filing the case. The heart of this court order simply states that “A discharge…  is granted to [the debtor].”

So what are the listed exceptions—what debts are NOT discharged through the Order of Discharge?

Exceptions to Discharge

 Section 523 of the Bankruptcy Code covers “Exceptions to discharge.” There are two categories of exceptions:

1) debts which will still be discharged unless the creditor objects and prevails in that objection, and

2) debts which do not require objection by a creditor.

1) Debts Requiring Successful Creditor Objection

In this first category, “the debtor shall be discharged for [the] debt of a kind specified” “unless, on request of the creditor… , the [bankruptcy] court determines such debt to be excepted from discharge… .” Section 523(c)(1) of the Bankruptcy Code.

In other words, these kinds of debts DO get discharged unless ALL of the following are true:

  • the debt is “of a kind specified”
  • the creditor  requests a court determination
  • the court determines in favor of the creditor that the debt should be “excepted from discharge”

There are 3 kinds of debts of this sort in which a creditor can ask for a court determination about discharge of the debt:

  1. Fraud Debts: incurred when a debtor makes a misrepresentation or commits fraud to get a loan or credit. Section 523(a)(2).
  2. Theft, Embezzlement, Fraud in a Trust Relationship: stealing from anyone, such as an employer or business partner, and especially from someone in a fiduciary relationship. 523(a)(4).
  3. Willful and Malicious Injury: intentionally and maliciously harming a person or business, and/or property. 523(a)(6).

Timely and Successful Objection

How does a creditor ask for a court determination that a debt falls within one of these 3 kinds? It files a formal “adversary proceeding”—a type of limited lawsuit—in the bankruptcy court. It has to file this within a strict deadline—usually within 60 days after a scheduled meeting of creditors. If the creditor received appropriate notice of the bankruptcy case but doesn’t object by this deadline, the debt is discharged forever.

And if a creditor does timely object, how does the bankruptcy court decide whether a debt should get discharged? Unlike most lawsuits on a debt, the court does NOT need to determine whether the debtor owes the debt. THAT’s generally assumed. Rather the question is whether the facts support the narrow grounds of fraud and such which make the debt not dischargeable. If the creditor cannot prove the necessary facts, the debt will still be discharged.

2) Debts Not Requiring Creditor Objection

The kinds of debts that are discharged unless a creditor objects generally involve some bad action by a debtor towards the creditor. The general idea is that if a creditor cares about being wronged it will raise an objection to the discharge.

But in a second category of not-discharged debts the creditors do not need to object. That’s because the kinds of debts in this category are not dischargeable simply because of the nature of the debt. There doesn’t need to be a court determination. It’s usually quite straightforward whether or not the debt belongs to these nondischargeable types of debt.

Here’s a list of debts that don’t get discharged even without creditor objection:

  1. Criminal fines, fees, and restitution
  2. Income taxes, and other forms of taxes, under certain conditions
  3. Child and spousal support
  4. Student loans that don’t cause an “undue hardship”
  5. Claims for bodily injury or death from driving while intoxicated
  6. Debts not listed in your bankruptcy schedules, under certain conditions

There ARE occasionally questions about whether the debt at issue fits the not-discharged definition. But it’s usually clear whether a debt is, for example, a criminal fine or child support. Our next 6 blog posts will go through each of these types, focusing on situations where there may be some ambiguity.

Note: Today’s blog post was about the discharge of debts in a Chapter 7 case. The debts discharged in a Chapter 13 case are slightly broader. We’ll address the difference in an upcoming blog post.  

Bankruptcy Timing and the Holidays: The “Cash Advances” Presumption of Fraud

December 14th, 2015 at 2:00 am

If you can, don’t do cash advances during the holidays if you’re contemplating filing bankruptcy. If you do, understand the rules about them.

 

In our last blog post we explained the “luxury” presumption of fraud. This provision in bankruptcy law increases the risk that you would not be able to “discharge” (legally write off) a very particular kind of debt. That kind of debt would be one that resulted from a purchase or a set of purchases totaling more than $650 made during the 90 days before filing bankruptcy.

The “cash advances” presumption of fraud is closely related to the “luxury” one. The dollar amounts and timeframe are just a little different. This “cash advances” presumption increases the risk that you would have to pay a debt tied to a cash advance or set of cash advances totaling more than $925 made during the 70 days before filing bankruptcy. (Notice that for this presumption to kick in, you incur somewhat more credit in a somewhat shorter period of time than with the “luxury” presumption of fraud.)

The Risk of Doing Cash Advances Shortly Before Filing Bankruptcy

We keep talking about the increased risk of not discharging a debt. What do we mean by this?

We mean that you could very well still discharge a debt from a cash advance done within the 70 days and more than $925. There’s just a greater risk that you couldn’t. Let us explain.

First, if you happen to do a cash advance of more than $925 (or a series of them with the same creditor) within the 70 days before filing bankruptcy, you may not have to pay that debt. That’s because you will not have to pay it unless a creditor complains about it, and does so within a deadline which is about 100 days after your bankruptcy case is filed. If you list the creditor in your bankruptcy case and it doesn’t complain within the deadline, that cash advance debt would simply be written off.

Second, the creditor may file a formal complaint and do so on time but that doesn’t mean it will win. A cash advance within the 70 days and exceeding $925 only creates a presumption that you didn’t intend to pay that debt. That presumed intent can be defeated by evidence showing that you did actually intend to pay it at the time you did the cash advance(s).

Third, you can avoid this “cash advance” presumption altogether by simply waiting to file your bankruptcy case until at least 71 days after the (latest) cash advance.  Then the creditor gets no presumption of fraud and actually has to come up with evidence that you didn’t intend to pay the cash advance debt. Without some evidence it can’t file a complaint (although the evidence could be circumstantial, such as you not making any payments on the account after the cash advance indicating lack of intent to pay it).

The Risk of Doing Cash Advances More than 70 Days before Filing Bankruptcy

Even a cash advance done outside the 70-day presumption period comes with some risk that this cash advance debt would have to be paid. The creditor just has to have evidence that you didn’t intend to pay the debt, no matter when the debt was incurred.

Two Practical Truths about the Advantage of Presumptions of Fraud

Beyond anything written in the law, here’s why the “cash advance” presumption of fraud (and the “luxury” one as well) works in favor of creditors:

1) The presumptions allow creditors to win without any evidence of fraud in cases where the debtors don’t respond to the creditors’ complaint. Because debtors who file bankruptcy not represented by an attorney are much more likely to not respond, some creditors are more inclined to file these complaints in those unrepresented cases. When the debtor does not respond on time, the creditor gets a judgment by default against the debtor.

2) When a debtor does respond (generally through his or her attorney) to a creditor’s complaint, the matter is often settled with the creditor getting paid at least something out of the cash advance at issue. That’s because the high cost in attorney time compared to the relatively small amounts usually at issue often makes fighting the complaint much more expensive than just quickly settling it.

Because of these two practicalities, the presumptions of fraud gives creditors more motivation to file complaints whenever there is a cash advance exceeding $925 during the 70 days before a bankruptcy filing, even without much indication that the debtor didn’t intend to pay that debt at the time.

The Bottom Line

The presumption only gives a modest legal leg up. But the practical advantage is significant. So whenever possible it’s usually worth waiting to file your bankruptcy case until after the 70-day “cash advance” presumption of fraud period (and the 90-day “luxury” one as well) has passed.

 

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210-342-3400

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