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Archive for the ‘creditors’ tag

The Automatic Stay in Chapter 7 and 13

November 22nd, 2017 at 8:00 am

Filing a Chapter 7 or 13 case both stop creditor collection actions against you just the same. But after that the differences are huge. 


Last time we focused on how you can use the Chapter 7 and Chapter 13 options to your time advantage. Chapter 7 “straight bankruptcy” is very fast. If all or most of your debts can be discharged (written off), that quickness can be an important advantage. But its speed can be a downside. If you are behind on a secured debt, Chapter 13’s 3-to-5-year-long duration can be a crucial advantage. It not only buys you time but gives your protection and flexibility for dealing with such special debts.

So, both bankruptcy options provide protection, but of different kinds. Let’s see how these work to see which would be better for you.

The Immediate Protection

With either kind of bankruptcy you get immediate relief from almost all creditor collection actions.

The “automatic stay” kicks in simultaneously with the filing of your Chapter 7 or 13 bankruptcy petition. Its power is in how fast it works and how strongly it prevents creditors from taking further collection action against you. (See Section 362(a) of the U.S. Bankruptcy Code.)

How Long the Protection Lasts

The automatic stay lasts as long as your case does. So, it expires about 3-4 months after you and your bankruptcy lawyer file a Chapter 7 case. On the other hand, it expires about 3-to-5-years after filing a Chapter 13 case. (See Section 362(c) of the U.S. Bankruptcy Code.)

However, a creditor may be able to end that protection as applicable to that creditor. Creditors usually can’t prevent the automatic stay from going into immediate effect at the beginning of your case. However creditors CAN ask for “relief from the automatic stay.” That is, AFTER the automatic stay goes into effect a creditor can ask the bankruptcy court to make an exception for that creditor and let it pursue you or its collateral.   (See Section 362(d) of the U.S. Bankruptcy Code.)

How does all this all works in practice under Chapter 7 vs. Chapter 13?

Chapter 7 Is Not Designed for Ongoing Protection

As we’ve said, the automatic stay protection lasts just 3-4 months at best under Chapter 7. But in addition, certain important creditors have more reason to ask for “relief from stay” to make that even shorter.

Chapter 7 provides no mechanism for dealing with important debts that you want or need to pay. Consider debts backed by collateral you want to keep, such as a home mortgage or vehicle loan. If you’ve fallen behind there’s no tool under Chapter 7 for catching up. You have to make arrangements directly with the creditor. If you (through your lawyer) and the creditor can agree, that’s fine. But if not, the creditor can file a motion asking for permission to foreclose on or repossess the collateral. It may even do so right after you file your case, before you’ve even started any negotiation. It’s signaling that you better meet its terms or else it wants to take back the home or vehicle.

Chapter 13 IS for Ongoing Protection

Chapter 13 starts with the fact that the automatic stay lasts SO much longer. It lasts a few years instead of a few months. But just as with Chapter 7, under Chapter 13 a creditor with collateral can file a motion asking for permission to foreclose on or repossess the collateral.

The big difference is that Chapter 13 provides a mechanism for catching up on such debts. If you’re behind on a mortgage or loan with collateral, your Chapter 13 payment plan will specify how much you’ll pay each month to catch up. Assuming your proposed terms are sensible, the creditor will likely go along.

A key difference is that Chapter 13 gives you an efficient and effective way to take the initiative. Because creditors know that bankruptcy judges will approve reasonable terms, they don’t object. And they don’t waste their time and money asking for “relief from stay” knowing it would have no effect. Then once your proposed payment plan is formally approved by the judge, creditors must live with your terms.

Be aware that if a creditor thinks your catch-up terms are not reasonable it can object or file a motion. Then usually a compromise can be worked out.

Of course you have to comply with the terms of your plan as approved by the bankruptcy judge. If you don’t, the affected creditor can then file a motion asking to be allowed to pursue the collateral. Depending on the facts you may be given another chance or you may not.

Conclusion

The relatively short period of protection under Chapter 7 may be just fine if you have no surviving debts. Chapter 7 may also be fine if the surviving debt can be handled reasonably through simple negotiation. But Chapter 13 provides longer and stronger protection for you regarding past-due debts secured by collateral you want to keep.

 

Keep an Open Mind about Chapter 7 or 13

November 17th, 2017 at 8:00 am

Here’s an example why to keep an open mind about filing under Chapter 7 vs. Chapter 13. Slightly different facts can make all the difference. 

 

Last time we introduced some of the main differences between Chapter 7 and Chapter 13. We suggested that you learn about them but also keep an open mind when you go see a bankruptcy lawyer. At that meeting you will always hear about advantages and disadvantages of each option you didn’t know about. Often you hear for the first time about certain tools that can really help you. So you may end up going a different route than you expected.

Here are two versions of an example that illustrates this well.

An Example Using Chapter 7

Assume the following. Three months after losing a job you get another one at a somewhat lower salary than before.  Over the years before you’d accrued $50,000 in credit card debt and medical bills on which you’d started falling behind. While you weren’t working you fell even further behind and one medical collector has just sued you. You’re now also 2 months behind on your $1,500 monthly home mortgage payments ($3,000). For personal and financial reasons you really want to keep your home.

A Chapter 7 “straight bankruptcy” case would very likely discharge (legally write off) all of your non-mortgage debts. In this example that would enable you—with a short-term tight but realistic budget and a temporary part-time job—to pay one and a half mortgage payments each month ($1,500 + $750) for four months to catch up. Your lawyer contacts your mortgage lender which agrees to that catch-up schedule.

So you decide to file a Chapter 7 case as a means to get current on your mortgage, and to get a fresh financial start. About 4 months after filing the case you’d have both.

An Example Using Chapter 13

Change the facts this time so that now you’re 8 months behind ($12,000) on your mortgage instead of just 2. Also your budget is tighter and no part-time job is available. So without paying any of your credit card and medical debts you can only afford $300 per month. At that rate you would need 40 months to catch up on your $12,000 mortgage arrearage. Your lender says that’s totally unacceptable.

A Chapter 13 “adjustment of debts” would give you up to 5 years to catch up on the mortgage. The mortgage lender would generally have to go along with this—be unable to foreclose or take other collection action—as long as you consistently stuck with your plan. You would have to pay all you could afford to every month for at least 3 years. You’d have to pay for 5 years if your income was too high. Either way the money would first go to catch up the mortgage. (This would be after or simultaneously while you were paying your lawyer fees and trustee fees). You would usually only pay the other debts—the credit cards and medical debts) if and to the extent you had money left over during the 3-to-5-year payments period.

Because you really want to keep your home you decide to file a Chapter 13 case. You don’t mind its length because that’s to your advantage—more time to catch up on the mortgage so that you can reasonably afford to do so. About 4 years after filing the case you finish catching up, the remaining debts are forever discharged, and you have a fresh financial start. You owe nothing except the fully-caught up mortgage. It took a lot longer than a Chapter 7 case but saving your home made it well worthwhile.

Conclusion

In both of these scenarios you were behind on a mortgage on a home you wanted to keep. In the first scenario the tools of Chapter 7 enabled you to meet your goal. In the second you needed the stronger tools of Chapter 13.

This is a simplistic example. Even here this illustration show that it’s important to keep an open mind about which Chapter is better for you. Real life is usually much more complicated. That’s all the more reason to get informed about your options and then be receptive about your lawyer’s legal advice about them.

 

Treatment of Different Types of Creditors in Chapter 13

July 26th, 2017 at 7:00 am

The laws about the treatment of different types of creditors can often be used in your favor to pay who you want or need to pay. 


Your Chapter 13 payment plan has to treat debts that are legally the same type of debts essentially the same way. But your plan can and must treat different types of debts quite differently. The laws related to this can be used to your advantage in many, many ways. Today we begin showing how this works with each of the three major types of debts.

Secured Debts

A secured debt is one which is legally tied to something you own. The secured creditor has rights against that property you own. Those rights usually include to repossess or foreclose on the property if you don’t pay the debt.

For example, your home mortgage(s), unpaid property taxes, judgments with liens on your home, income tax liens can all be debts secured against your home. And your vehicle loan is secured against your vehicle.

Debts may be secured because you directly agreed to make them secured, like a vehicle loan. But debts can also be secured involuntarily by certain creditors in certain circumstances. An involuntary example is an income tax lien on your home.

Secured creditors have rights against whatever property of yours secures their debt. That gives them leverage in a Chapter 13 case if you want to keep that property. You usually have to pay part or all of the debt to keep the property.

If you want to keep the property securing the debt, and it’s something reasonably necessary for you to keep (like your primary vehicle or your home), that creditor leverage actually helps you. It usually allows you to favor that creditor over most of your other creditors.  This means that you can pay your secured debt ahead of or instead of most other debts.

For example, you would usually be allowed to catch up on a vehicle loan in your Chapter 13 plan ahead of paying your unsecured credit cards. Often as a result your vehicle loan gets paid in full while your credit cards get only partially paid. Sometimes the credit cards (and other such unsecured debts) get nothing at all.

Priority Debts

Priority debts are simply those which the law has determine are worthy of more favored treatment over other debts. Each type of priority debt has a particular reason for being treated specially.

Some of the most common and important priority debts for consumers are child and spousal support and recent income taxes. Support obligations are treated as special because of the hardship nonpayment tends to cause. Taxes are treated as special because their nonpayment hurts everyone.

In a Chapter 13 payment plan, you must pay priority debts in full before paying other unsecured creditors anything. As with secured debts, you usually want and need to pay your priority debts. You may well have decided to file a Chapter 13 case because you are protected while paying your priority debt(s).

As with secured debts, being required to pay your priority debt(s) ahead of other unsecured debts means those other debts get less, and sometimes nothing. You are essentially paying the priority debts to the detriment of your other debts.

General Unsecured Debts

This third type includes everything else. These are debts that have no rights to anything you own, and are not on the list of priority debts.

A Chapter 13 plan may pay general unsecured debts anything from 0% of what you owe them to 100%, depending on the circumstances. How much you pay your general unsecured debts depends on many factors. Broadly speaking, these debts get paid whatever is left over after you pay the secured and priority debts.

Limited Flexibility 

In Chapter 13 you and your bankruptcy lawyer have to follow a detailed set of rules about treatment of creditors. But those rules come with a certain amount of flexibility. The rules give structure to a Chapter 13 plan. The flexibility can help make it work to fit your unique personal circumstances.

We’ll show specific ways that these somewhat flexible rules can help you in our next few blog posts.

 

Using “Preference” Law to Your Advantage

April 19th, 2017 at 7:00 am

Make your bankruptcy trustee work for you by retrieving your recent payments to, or garnishments by, creditors–to your benefit.   

 

Our last 4 blog posts have been about “preferences” in bankruptcy. The last two have focused on how your trustee’s “preference” claim could cause significant problems, and how to avoid them. But you can also use “preference” law to your advantage. Today we get into how to do so.

The Big Picture

Imagine that you are under serious financial pressure, maybe thinking of filing bankruptcy, maybe trying hard to avoid doing so. Then you get threatened with a lawsuit by a debt collector if you don’t start making payments on its debt. So you somehow squeeze some precious money out of your way-overstretched budget and pay a chunk of the debt. Or instead you were sued earlier and the creditor just grabbed a big part of your paycheck or checking account. Maybe you’ve had to suffer through a number of these payments or garnishments.

Wouldn’t it be nice if, after being forced into bankruptcy anyway, you were able to get that money back? Wouldn’t it be nice to be able to put that money to better use?

Under certain circumstances bankruptcy’s preference law can accomplish this.

You actually need two sets of circumstances. First, the money paid to the creditor has to qualify as a “preference.” Second, you need to owe a particular kind of debt that you want or need to get paid.

Payment(s) Qualifying as a “Preference”

A “preference” is an extraordinary aspect of the bankruptcy system. In general, filing a bankruptcy case creates a bright line between what happened before that moment and what happens afterwards.  Between “pre-petition” events and “post-petition” ones. So, generally the assets that your bankruptcy case deals with are those in existence at the time of filing. And to a very limited extent, bankruptcy also pays attention to post-petition assets. But for most purposes what you owned before filing isn’t part of the bankruptcy picture.

However, in a few limited situations the bankruptcy system is allowed, indeed required, to look backwards from the filing date. “Preference” payments are one such situation. Under certain circumstances, payments you made, voluntarily or involuntarily, during the 90 days BEFORE filing can be undone. They are “undone” not by you but by your bankruptcy trustee.

The trustee’s job is to gather assets to distribute to creditors. If a payment a creditor received during the 90 days before filing qualifies as a “preference,” the creditor is forced to pay that money back, handing it over to the trustee. The trustee then takes that money and distributes it to your creditors under a legally prescribed priority system.

(The preference look-back period goes back a full year as to certain special creditors. Basically this includes creditors with whom you have a close personal or business relationship. But we are focusing today only on the 90-day look-back period. That’s because those are the creditors whose “preference” payments you’d more likely want undone.)

The Elements of a Preference

In order for the trustee to get back a payment you paid to the creditor in the 90 days before the bankruptcy filing that payment must meet a number of elements. Two of those elements tend to be the most important:

These two elements are often quite easy to meet.

First, “insolvent” is defined in the Bankruptcy Code (Section 101(32)) as the “financial condition such that the sum of such entity’s debts is greater than all of such entity’s property.” Most consumers contemplating bankruptcy are likely insolvent under this definition. (The biggest likely exception if for homeowners who have a meaningful amount of equity in their homes.) If your combined debts are greater than your combined assets, you meet this “insolvent” element.

The second element is even more likely met. It involves a comparison between the amount of the payment made to the creditor and the amount the creditor would have received in a bankruptcy liquidation. In most consumer bankruptcy “liquidation” cases creditors receive nothing for two reasons. First, everything or near everything the consumer owns is “exempt,” protected from bankruptcy liquidation. So there is nothing to distribute, no liquidation. Second, even if there are some assets to liquidate and distribute it all goes towards administrative costs and “priority” debts. So nothing trickles down to the creditor in question. Since the creditor would have gotten nothing in a bankruptcy liquation, the entire amount it received in payment qualifies as “preferential.”

For Example

Imagine that Creditor X garnished $1,000 out of your checking account right after you deposited your tax refund. You file bankruptcy case a month later.

You are a consumer debtor whose debts have exceeded the amount of your assets for at least the past two year. So you were insolvent at the time of the garnishment.

The assets that you do have are all covered by the property exemptions available to those filing bankruptcy within your state. Therefore Creditor X would have received nothing in a Chapter 7 distribution.

Since both of those elements are met, the full $1,000 garnishment received by Creditor X is a “preference.” Your bankruptcy trustee could require Creditor X to send that $1,000 to him or her.  If this creditor would fail to send it voluntarily, the trustee could sue to require the creditor to pay the $1,000.

The $600 Safe Haven for Creditors

There’s one last twist if your debts are “primarily consumer debts.” Then your bankruptcy trustee may not require a creditor to pay back a payment if “the aggregate value” of the payment(s) “is less than $600.” See Section 547(c)(8).

The Preference Doing You Some Good

At the beginning we referred to two things necessary for a preference to do you some good. First, the payment has to qualify as a “preference.” We’ve covered that.

And second, you need to owe a particular kind of debt that you want the trustee to pay, a debt that you’d otherwise have to pay out of your own pocket. It’s a lot better to have the trustee pay it out of money you’d already paid to another creditor, and put it to good use.

We’ll cover how this second part works in our next post (this coming Friday).

The “Preference” Problem

April 14th, 2017 at 7:00 am

 Avoid the frustrating surprise of having one your friendly creditors be challenged by your bankruptcy trustee with a preference action. 

 

In the last two blog posts we’ve introduced “preferences.” Today we get into what we’re calling dangerous or bad preferences, ones you’d rather avoid.

Preference Law

A preference is a payment you make to a creditor before you file bankruptcy which the creditor must repay after you file bankruptcy. However, the money that you paid to the creditor does not come back to you. Instead it goes to your bankruptcy trustee, who then distributes it to your creditors under a strict priority system.

To be clear, most pre-bankruptcy payments you make to your creditors are not preferences. There are a number of timing and other requirements for a payment to be considered a preference. In fact, most consumer bankruptcy cases don’t have ANY preference issues.

But if a creditor in your bankruptcy case DOES get hit with an unexpected and unwanted preference demand, it can be awkward problem. That would especially be a shame because preferences are usually easily avoidable.

So today we show the kind of headaches a preference can cause. Then in our next blog post we’ll show you how to avoid them.

A “Bad” Preference

With most of your creditors you probably don’t care if your bankruptcy trustee wants them to pay back some money you’d paid them earlier. But if you have some special relationship with that debtor, you might deeply care. You probably made a point of paying that special creditor before you filed bankruptcy. So you’d understandably be unhappy if the creditor had to pay it to the trustee after you file.

We’re loosely calling a “bad” preference any in which you would not want the trustee to take back a payment you made to a creditor.

Stumbling into a Preference

Here’s how it usually happens.

You’re in financial distress. You may or may not be considering bankruptcy. But money is very tight so that you can’t pay all you debts as they come due. So you have to decide who you are going to pay at that point and who you are not.

So how do you prioritize? What if you owe a relative or friend some money? Maybe you don’t pay them because you tell them you’re having a tough time. You ask them to be patient.

But maybe you’re too embarrassed to do that. Or maybe you know that this person really needs the money. You may be thinking about filing bankruptcy. You’d rather the person not know about it if you do file, or not get hurt by it, or both. You may even think that it’s not legal to pay the person back after you file bankruptcy so you want to take care of it beforehand.

So some combination of pride and principle motivates you to pay him or her, even when it’s really tough to do. So you do.

Once You File Bankruptcy

Paying a debt to anyone who you want to favor during the one-year period before filing bankruptcy could result in that person being legally required to pay “back” to your bankruptcy trustee the amount you paid him or her. Look at our blog post of this last Monday about what conditions would make this happen. And then look at the very last blog post of Wednesday about why this happens less than you’d think.

Here’s what sometimes happens in real life.

There are a couple questions related to this in the formal bankruptcy documents that you file through your lawyer. These questions are about payments made to creditors before filing, including during the 365 day-period before filing the bankruptcy case.  But you make not consider the person you paid a “creditor.” Or you may honestly forget that you paid this person 10-11 months ago.

But then the trustee asks you about this a month or so later at the “meeting of creditors.” You realize that friend or relative was indeed a creditor. Or you now remember that you made that payment. And now the trustee wants to make that person pay the amount you paid, “back” to the trustee.

Messing Up Your Intentions and Expectations

Preference law can be extremely frustrating. Instead of you coming across as responsible and considerate to your favored creditor—the result can be the opposite.

You wanted to pay off that debt and fulfill a moral and legal obligation to that person. You may have not wanted the person involved in, or even aware of, your bankruptcy case. You wanted to be good to the person, avoid a headache for him or her, and for yourself.

But instead your favored creditor gets mixed up in your bankruptcy case after all. And this happens in a way potentially embarrassing to you and harmful to him or her. The person may have to give up the money you paid months earlier, and has most likely been long spent. And so the person has to scramble to come up with the money demanded by the trustee. 

Then after all this, your special creditor would again be out the money you paid. So at that point you may still feel that you have an obligation to make good on that debt. So you could end up paying that debt to him or her a second time, after your bankruptcy is over.

Clearly not a good result!

 Avoid the Risk of a “Preference”

The good news is that you can avoid this situation. Our next blog post on Monday will explain how.

 

Going to Trial on a Nondischargeability Dispute with a Creditor

March 24th, 2017 at 7:00 am

The trial, almost always in front of a bankruptcy judge and no jury, is the final determinator whether the challenged debt gets discharged. 


Today’s is the last of three blog posts on the procedure for litigating whether a debt gets discharged in bankruptcy.

Discharge Challenges Are Rare, Going to Trial is REALLY Rare

To determine whether or not a debt gets discharged in bankruptcy very rarely involves any litigation. The vast majority of debts are simply discharged. Those that are not are the exception. And most of those exceptional debts that bankruptcy does not discharge are either never discharged—such as child support—or are not discharged unless some rather clear conditions are met—such as with income taxes.

With the debts that are easily discharged, the creditors have no grounds to object and so they don’t. With debts that clearly cannot be discharged, there’s no point for debtors to complain and so they don’t.

There are only a few specific circumstances in which creditors have grounds for objecting to discharge. Mostly this is either when the debtor allegedly incurred the debt fraudulently, or caused “willful and malicious injury” to the creditor or its property. Since these circumstances do not apply to most debtors, creditors don’t usually object to a debt’s discharge.

When creditor’s DO object to discharge, the matter very seldom goes all the way to trial. That’s consistent with lawsuits in general—they seldom go to trial. Creditor objections to discharge are usually either:

  • dismissed (withdrawn or thrown out) because the creditor did not have valid grounds to object
  • settled with the debtor paying the full debt because the grounds for objection were solid
  • settled with the debtor paying only a portion of the debt because the grounds were weaker, but not weak enough to justify dismissing the objection

Why Creditor Objections to Discharge Seldom Get All the Way to Trial

The one-word answer is: money. Litigation is expensive.

Nondischargeability litigation is usually less expensive than most because the legal and factual issues are often narrower. For example, if you are accused of fraud by not including a significant debt in your written application for a loan, a key factual question may be whether the creditor reasonably relied on that inaccuracy when making the loan. That may simply turn on whether the lender pulled a credit report before making the loan, and whether that missing debt was disclosed on that credit report. If so, the debtor would have a strong argument that the creditor did not reasonably rely on the debtor’s incomplete loan application, which is a required element to show fraud.

But even if the issues are comparatively simple, litigation can still be an inefficient dispute-resolving mechanism. Going through “discovery” to get at all the pertinent facts can take a lot of time and effort. The truth of what happened can be slippery.

And of course lawyers are expensive. Unless the amount of debt is very large, the cost of litigating can approach or even exceed the amount in dispute. Spending so much  doesn’t make economic sense. So there is lots of practical pressure on both sides to settle a nondischargeability dispute quickly. And that almost always means doing so before it gets all the way to trial.

Settlement by Mediation or Arbitration

If the debtor and creditor can’t settle informally, most bankruptcy courts encourage “alternative dispute resolution” through mediation or arbitration.

Mediation involves a mutually respected mediator who can’t force settlement but can effectively encourage it. The mediator helps each side see the truth of their positions, often successfully inducing settlement.

Arbitration is a simplified trial-like procedure in which the arbitrator determines whether or not the debt is discharged. That determination may be binding or not. Either way, it can be a quicker way of getting to a determination or settlement.

Neither of these procedures is inexpensive, but usually cost much less than a full trial.

Going to Trial

A trial is the culmination of a lot of effort. The complaint has laid out the creditor’s step-by-step argument why the debt should not be discharged. The debtor has made clear which parts of that argument her or she disputes. Both parties have dug up the facts through the discovery process. Now it’s time bring it all together in front of the bankruptcy judge.

Trials in bankruptcy adversary proceedings are almost always in front of a judge instead of a jury. That streamlines the process considerably. Most consumer nondischargeability trials take only from a half day to one or two days. As we said above, the issues tend to be pretty sharply focused. So the evidence that each side presents can be presented relatively quickly.

The trial generally proceeds in the way you can imagine from everything you’ve heard about court trials. Each side usually makes an opening statement about what they intend to prove. Then each side presents witness testimony and documentary evidence to support its argument. There is opportunity to challenge the testimony and evidence presented by the other side. There are detailed rules about what evidence can be presented and how.

After all the evidence has been presented, and each side has had the opportunity to rebut the other’s evidence, each gives a closing statement. Then the judge, after weighing all the testimony and evidence, decides whether the debt at issue is discharged or not. He or she enters a judgment so stating.

 

Adversary Proceedings by the Debtor

March 8th, 2017 at 8:00 am

Sometimes it’s in your best interest to force an issue in bankruptcy court by, in effect, suing a creditor in an adversary proceeding. 


The last two blog posts have been about you as a debtor being hit by an adversary proceeding. A creditor may try to use that tool to prevent you from legally writing off a debt.  A Chapter 7 or Chapter 13 trustee may try to kick you out of bankruptcy altogether if you don’t follow the rules. Even though these situations are relatively rare, you still want to get advice so that you can avoid them.

However, you can also use an adversary proceeding as a tool to benefit you in certain circumstances. You have some significant practical advantages in bankruptcy court that you would not have in normal state court.

The Advantage of a Limited Issue

The disputes that you can and would want to raise are specific, limited ones. Issues like whether you can discharge—legally write off—a debt. Or whether a creditor violated bankruptcy law and has to pay you damages.

When you have a focused issue such as these, your cost for resolving the dispute are less.

For example, take the issue of whether you can discharge a debt. Most debts are clearly either discharged in bankruptcy or they are not. If you owe some spousal support, that can’t be discharged. There’s nothing to dispute.

But sometimes it’s not so clear. What if you were obligated to sign over a vehicle to your spouse, and there is some indication that your spousal support was reduced for the first year as a result? You haven’t yet signed over the vehicle. Now you are filing a Chapter 13 case which allows you to discharge divorce property settlements. You want to keep the vehicle for yourself. Is the divorce obligation to sign over the vehicle a spousal support obligation or a property settlement one?

The bankruptcy court gets to decide. The issue is a narrow one: is that obligation “in the nature of support” or not for bankruptcy purposes? The divorce court has already determined that divorce law says your spouse gets the vehicle. This is a debt you owe—everybody accepts that. Now the issue is simply whether or not it is a debt that bankruptcy law makes dischargeable. Again, under all of the facts, is it “in the nature of support”? The entire dispute focuses on that single issue, making court resolution of that relatively straightforward and quick.

The Advantage of an Efficient Court

The bankruptcy disputes are resolved quickly because of some practical aspect of bankruptcy litigation.

First, it’s a federal court so resources tend not to be stretched as thin as in many state courts. Often state courts cases move incredibly slowly simply because there are not enough judges to go around.

Second, bankruptcy courts do nothing but bankruptcy. State courts have to deal with a huge range of criminal and civil matters. For constitutional reasons, the criminal cases often take precedence on the court’s calendar. On the civil side, theses courts deal with absolutely everything from apartment evictions to mega-million dollar business disputes. In bankruptcy court the issues are comparatively very limited. So systems have been established to deal with them efficiently. And the bankruptcy judges are essentially experts at these issues and can resolve them relatively speedily. So you get your dispute resolved fast, significantly reducing everybody’s costs.

The Advantage of a Lawyer Already in Your Corner

One of the biggest challenges when you are considering whether to bring a lawsuit is finding a good lawyer to represent you. It’s certainly one of the biggest practical problems if money is tight.

But when you are filing any kind of bankruptcy case, virtually always you’d have retained a lawyer for that purpose. You’ve presumably built up a trusting relationship. You’re likely being hugely benefitted financially from the debts you are discharging. So when you’re confronted with the question whether you should sue a creditor (by filing an adversary proceeding against it), you have a lawyer at your side to advise you about it. He or she is already familiar with your situation. The lawyer is very likely also very familiar with the focused legal issue at hand.

Conclusion

So resolving a dispute in bankruptcy court is to your advantage because you have your lawyer at the ready, an efficient and quick court, and narrow issues to resolve. What are those relatively narrow issues that may make suing a creditor in bankruptcy worthwhile? We’ll discuss them in our next blog a couple days from now.

 

Creditors Paid Nothing under Chapter 13

December 19th, 2016 at 8:00 am

Chapter 13 payment plans usually have you pay something to all of your creditors. But not necessarily. Certain creditors may get nothing. 

 

Our last blog post was about the “discharge”—the permanent write-off—of debts through a Chapter 13 “adjustment of debts.” This discharge happens at the end of a successful case, which usually takes 3 to 5 years.

Misconceptions about Chapter 13

Although 3 to 5 years may sound like a long time, the length can actually be a big advantage. You have more time to catch up on or pay off debts that you either want to or must pay. So what seems like a disadvantage could actually be an advantage. 

There are lots of other misconceptions about how Chapter 13 works. That’s partly because it is such a flexible option. Chapter 13 cases can be very different from each another, with each addressing the unique circumstances of each person. So that leads to some confusion, as you hear about something in one case that may have little or nothing to do with how Chapter 13 would work for you.

One misconception is related to an objection often raised about Chapter 13: why pay my creditors all or part of what I owe them when I could just discharge those debts entirely in a Chapter 7 “straight bankruptcy” case?

Actually, often in Chapter 13 you pay some creditors nothing at all. Sometimes even all of your creditors receive nothing, expect those you want or need to pay.

A Standard Chapter 13 Case

In maybe the most standard kind of Chapter 13 case (if there is such a thing!), you pay certain special debts in full and you pay other more ordinary debts only a percentage of what you owe, and often only a small percentage. The special debts you pay are often those secured by collateral you want to keep. So you may be catching up on a home mortgage arrearage or “cramming down” a vehicle loan. Oher special debts are ones that can’t be discharged in Chapter 7. Examples include recent income tax debt or unpaid child or spousal support.

Then your remaining “disposable income” goes towards the rest of your debts. Usually you pay those “general unsecured” debts only whatever’s left over. If the special debts you are paying in full are relatively small and your “disposable income” left over each month is relatively large, you could pay a relatively high percentage of what you owe on the “general unsecured” debts. But more often you don’t have much money left over and so you end up paying just a drop in the bucket of what you owe on those debts.

Debts Paid Nothing

So how could you pay nothing at all on certain debts in a Chapter 13 case? Here are four circumstances that would happen:

  1. No money available for “general unsecured” debts because ALL of your “disposable income” is spent on your special debts.
  2. A creditor does not file a proof of claim on the debt, or does not do so on time. So you don’t pay anything on that debt.
  3. Your bankruptcy lawyer objects to a creditor’s proof of claim. Then the creditor either fails to respond on time or you prevail on that objection.
  4. At some point in your Chapter 13 case your circumstances significantly change. So your lawyer converts your case into a Chapter 7 one, discharging all or most of your debts in full.

We’ll cover each one of these in our next 4 blog posts. This will give you a better idea how Chapter 13 really works.

 

Creditor Claims and Proofs of Claim

November 16th, 2016 at 8:00 am

In most Chapter 7 cases, there is not much practical effect to what creditors put on their proofs of claim.

 

Bankruptcy Debts, Claims, and Proofs of Claim

Filing bankruptcy is of course about dealing with your debts. A debt is what you owe to a creditor on its claim against you. A creditor files a “proof of claim” in your bankruptcy case, stating how much you owe and its basis for that. See Section 501 of the U.S. Bankruptcy Code.

Objecting to a Proof of Claim

You as the debtor can accept that proof of claim or you can object to it. You can object that you owe the debt altogether or that the amount is wrong. If you don’t object, the claim “is deemed allowed.” The bankruptcy court assumes that whatever the creditor put into its proof of claim is accurate. See Section 502(a).

If you do object, the bankruptcy “court, after notice and hearing” shall determine the amount of such claim…. and shall allow such claim in such amount… .” See Section 502(b).

What Difference Do Creditor’s Proofs of Claim Make?

The proofs of claim filed by creditors can make all the practical difference in the world. Or they can make no difference at all. It depends on the circumstances of your case.

First of all, in many, probably most, bankruptcy cases there is little or no dispute about how much the debtor owes on his or her debts. So in a case like that you would have no grounds to object to your creditors’ proofs of claim.

Second, in many cases some of the creditors, or even all of them, don’t receive any money through the process. So it doesn’t matter what they put on their proofs of claim. Whatever they claim does not change that they are getting nothing.

Third, even when the creditors are receiving something, often their proofs of claim make no practical difference. They do not affect the amount you pay. That’s because in many consumer bankruptcies there is only a set amount of money available. The amounts of debts reflected in the proofs of claim don’t change what you have to do. There is a limited pot of assets or money that the creditors must share. The amounts in each proof of claim at most just affect how that pot is distributed among the creditors.

And yet, in some cases what the creditors put on their proofs of claim can make all the difference. Let’s look at this in Chapter 7 cases today, and then in Chapter 13s in our next blog post.

What Difference to Proofs of Claim Make in Chapter 7 Cases?

Chapter 7 “straight bankruptcy”—the most common form of consumer bankruptcy—usually does not involve proofs of claim at all. That’s because most of the time there is no money to distribute to creditors at all. That’s because most cases are “no asset” cases—everything the debtor owns is “exempt,” protected from the creditors. The Chapter 7 trustee has no right to take anything to “liquidate” on behalf of the creditors. With nothing to liquidate, there’s nothing for the trustee to distribute, and no reason for the creditors to file proofs of claim. Indeed, at the beginning of a consumer Chapter 7 case creditors are often told not to file proofs of claim. They’re told that if the trustee does find assets to distribute creditors will then be asked to submit their claims.

And even in the small minority of Chapter 7s that are “asset” cases, the proofs of claim make little difference. That’s because there is a very limited pool of money distributed—the proceeds of the trustee’s sale of non-exempt assets. The amount generated from that sale is puny compared to the amount of the debts. And the amount available for the creditors is fixed. So, as mentioned above, there is a limited pot of assets or money that the creditors must share. The amounts in each proof of claim at most just affect how that pot is distributed among the creditors. It doesn’t increase or affect what you have to do.

Let’s make this clearer with a simple example. You have one of those somewhat unusual Chapter 7 cases in which you have a non-exempt asset. You closed a business and have some leftover business equipment. Or a boat you no longer want to maintain. Either way let’s say the trustee sells whatever is not exempt for $5,000. You owe $3,000 in “priority” income taxes to the IRS, plus $100,000 to all your other creditors. The trustee is required to pay the taxes in full before paying anything to the other creditors. He or she also receives a fee of as much as 25% the $5,000 for doing the liquidation and distribution. There is less than $1,000 left over for the other creditors, who are paid pro rata based on their proofs of claim.

So you can see that, with that limited amount to distribute, it hardly ever makes any practical difference what all the other creditors put on their proofs of claim in most Chapter 7 cases.

 

“Relief from the Automatic Stay”

October 7th, 2016 at 7:00 am

Creditors sometimes have grounds to ask for permission to resume or start collection action against you in spite of your bankruptcy filing.

 

In our last blog post we talked about the “automatic stay.” It’s one of the most important benefits of filing bankruptcy. It’s certainly the fastest, going into effect immediately when you or your lawyer files your bankruptcy case. The automatic stay stops virtually all attempts by creditors to collect their debts against you, your money, and your property.

But sometimes this protection is only temporary. Creditors sometimes have some say about whether the automatic stays in effect, its protection ends, or is modified. See Section 362(d) of the U.S. Bankruptcy Code.

“Relief from the Automatic Stay”

When you think of “relief” in bankruptcy you most likely think of your relief from creditors. A couple blog posts ago we said that at the heart of the bankruptcy petition are the words, “I request relief.”

But when used in this phrase, “relief from the automatic stay,” the meaning is essentially the opposite. The phrase refers to a kind of relief that benefits a creditor. When a creditor wants to challenge the protection the automatic stay is giving you, it asks the bankruptcy court for “relief from the automatic stay.” (A shorthand form of that is simply “relief from stay.”) It’s asking for permission to pursue either the debt in general or some specific aspect of your obligation.

Most Creditors Don’t Ask for Relief from Stay

Creditors only have grounds to ask for this kind of relief in certain circumstances. Don’t be concerned that all or most of your creditors will try to take this protection away from you. Most bankruptcy cases are completed without any creditor filing a motion for “relief from stay.” In most cases all or most of your creditors must abide by the automatic stay protections throughout the case.

Secured Creditors with Grounds for Relief from Stay

Most creditors which file motions for relief from stay are doing so to get permission to repossess collateral. Or they are trying to put conditions on the automatic stay to induce you to keep making your stream of payments on the collateral-secured debt.

Two examples:

  • You file a Chapter 7 “straight bankruptcy” case when you are 2 payments behind on a vehicle loan. You indicate on your Statement of Intentions that you want to keep the vehicle. The lender files a motion for relief from the automatic stay for two purposes: to push you to catch up on those late payments more quickly, and to get court permission to repossess the vehicle if you don’t make those payments or fall further behind.
  • You file a Chapter 13 “adjustment of debts” to stop your home from being foreclosed.  You’re 15 months behind on payments of $1,200, a total of $18,000. Your Chapter 13 payment plan gives you 5 years to pay that arrearage. The bankruptcy court approves this plan, but then ten months later you miss a plan payment and a mortgage payment.  The mortgage holder files a motion for relief from stay to get permission to resume the foreclosure. You can surrender the home at that point if you’ve decided you don’t want it. Or if you still want to keep the home, most of the time you are given another chance. However, the continuation of the automatic stay is conditioned on you meeting certain terms. Those terms are usually put into a court order, conditioning your protection for the home. At that point you can automatically lose the automatic stay as to the home if you don’t comply with the new terms.

 

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