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Archive for the ‘Discharge Of Debts’ Category

Forgotten Debts

April 22nd, 2019 at 7:00 am

What do you need to do, what efforts is worth taking, if there are debts you don’t have any records on or you’ve forgotten about?  

 

Several blog posts ago we introduced the law that debts “neither listed nor scheduled” risk not being forgiven in bankruptcy. Section 523(a)(3) of the Bankruptcy Code. This follows the bankruptcy principle that debts are forgiven—“discharged”—unless a debt fits within a specific exception. Debts “neither listed nor scheduled” is one of the exceptions.

Related to this exception to discharge we’ve recently looked at:

  • how to add a debt after filing your case that you didn’t originally list, and your timing for doing so
  • an exception to this discharge exception, that is, your unlisted creditor’s debt still being discharged if it still finds out about your case, and does so on time
  • debts sold or assigned to collection agencies

This leaves one last question for today about unlisted debts:

What do you do if you don’t know all of your debts because you’ve moved or lost track of them for any other reason?

This practical question gives us the opportunity to apply the principles we’ve been digging into these last few blog posts.

The Potential Consequences of Not Listing Debts

Start with the assumption that you will continue to owe any debt you don’t include in your bankruptcy debt schedules. Obviously, filing any kind of bankruptcy is a big deal. The discharge of debts is a legal right, but one that you can exercise very seldom. Hopefully it’s something you’ll only need once in your life. You want to do it right.

Chapter 7 “straight bankruptcy” generally takes about 4 months from start to finish. It costs pretty much the same in fees and damage to your credit whether you include all your creditors or miss one or two. You vastly increase its effective cost if afterwards you continue owing a debt or two that you could have discharged. Plus, instead of getting the peace of mind of a full fresh start, you’d be saddled with potentially avoidable debt.

Chapter 13 “adjustment of debts” involves a payment plan lumping together all your debts. Most unsecured creditors have to share out of a pool of money based on what you can afford to pay. That is often a small percent of what you owe, perhaps even 0%.  If you neglect to list a debt in your schedules, it can’t participate in your plan. So, instead of paying that debt the same percentage that you’re paying others, you’d have to pay it in full. Since all your money is earmarked for your other creditors, you’d have nothing to pay the unlisted creditor. So when it forced you to pay—such as by garnishing your paychecks—that would disable your Chapter 13 plan. Frankly, that would be a mess.

So, of Course, Do All You Can to Know and List All Your Debts

We don’t want to scare but rather to motivate you. It’s worth the effort to figure out who you owe and to find their accurate addresses.

One obvious place to start is with a credit report. Talk with your bankruptcy lawyer about getting free ones from all three of the major consumer credit agencies.

But it’s very important to know that a credit report is NOT necessarily a complete list of your debts. For some people it might be. But for others their credit reports would be woefully incomplete. Financial institutions and major consumer creditors will quite reliably be on your credit reports. But medical providers and various other kinds of creditors—not so much.

It IS worth sifting through ALL of your paper and computer files (and piles!) to find any other debts. Scour through your memory about possible obligations you haven’t thought about lately. Think about old unpaid landlords and utilities, possible bounced checks, or unpaid personal loans from friends or family.

Possible Claims, Ambiguous Amounts

Consider situations where you may or may not owe anything. Are there any old or more recent unresolved vehicle accidents? Might you have caused personal or property damages to some person or business? Are there any unusual possible claims against you, for defamation, embezzlement or other misuse of funds or of trust? Could there be any claims come out of an old or not so old divorce, non-marital relationship, any family fight, or the closing of a business? Are there any almost forgotten threats against you to pay for anything whatsoever?

Bring any of this stuff up with your bankruptcy lawyer, preferably at your first meeting. Some situations may genuinely not warrant including as a possible debt. Your lawyer is the person who knows how to protect you, and to guide you through the tough judgment calls. You need to ask the questions so that he or she can give you the right advice.

Debt Amounts

 It’s generally not that important to know how much you owe—a sensible estimate is often good enough. But again talk with your lawyer, because sometimes—depending on the type of debt—the amount is important.

Collection Agencies

If you know the original creditor but not a subsequent collection agency, start by listing the original creditor. It may well pass on your bankruptcy filing information to the collector (although you can’t count on this). Also, the original creditor may actually still owe the debt. The collector may have only a temporary collection agreement.

You still do want to list any and all collectors on an account. That’s because it’s hard to know who owns the debt. That may take not just looking through all your papers but also doing internet research and making phone calls. Your bankruptcy lawyer and his or her staff will be your guide.  

Very Old Debts

Most debts can get old enough that the creditors can no longer collect on them. Most states have statutes of limitations on the collection of debts.

But those laws are often complicated, with different lengths of time for different kinds of debts. There are different triggers that start the time running, and other events that can suspend (“toll”) the time from running. The time limit can sometimes be extended simply by you being out of state or hiding from collection.

Even if a statute of limitation arguably applies you’d rather not have to defend a collections lawsuit on this basis.

Talk with your bankruptcy lawyer about what to do to best protect your from old and very old debts.

 

Debts Sold or Assigned to Collection Agencies

April 15th, 2019 at 7:00 am

What happens if you list a creditor in your bankruptcy case but, unknown to you, it sold the debt to a collection agency that you don’t list? 

 

Our blog post two weeks ago was about needing to list all your debts in a bankruptcy case in order to write them off. This is part of a series of blog posts about debts that may not get discharged (written off) in bankruptcy. The law says that bankruptcy does not discharge debts that are “neither listed nor scheduled” in the bankruptcy documents. Section 523(a)(3) of the Bankruptcy Code.

Special Scenarios

This raises some practical questions, including the following:

  1. Is a debt covered if you don’t list it but the creditor still learns about your bankruptcy case?
  2. What happens if you list the creditor but it had previously sold the debt to a collection agency?
  3. What do you do if you don’t know all of your debts because you’ve moved or lost track of them for some other reason?

We addressed the first of these last week, and discuss the second one today.

Debts Listed but Sold to Collection Agency

So you list the creditor on your bankruptcy schedules but after filing learn it sold the debt to another entity. Let’s assume you know the name and address of the new creditor or collection agency.

Debts Sold Before Your Bankruptcy Filing

Let’s start with the situation that the debt was sold to the new entity before you filed the bankruptcy case. You only find out about it after your filing. You either receive a new notice about it or dig up an older one you hadn’t found earlier.  What should you do?

There’s a decent chance that when the creditor you listed gets the bankruptcy notice it will forward it to the new owner of the debt. That would seem to be the sensible and business-like thing for it to do. Then the new owner would learn about your case even without being listed on your bankruptcy schedules. It would be covered by your bankruptcy case and the debt would likely get discharged. (See our last blog post about the creditor’s “actual knowledge” exception.)

Three Problems

There are three problems with this.

First, the listed creditor may simply not bother to pass on your bankruptcy notice to the new debt holder. The creditor no longer has any interest in the debt. It doesn’t owe you any favors. Why shouldn’t it just throw away the bankruptcy notice, and not inform the new debt holder? Then this new debt holder—the creditor you actually owe—may well never find out about your bankruptcy. You could easily continue owing the debt. It’s not safe to rely on the listed creditor to tell the new debt holder. It’s way too risky.

Second, even if the listed creditor does pass on the bankruptcy notice the new debt holder may not receive it. Or that debt holder may simply say it never received it. Good luck getting proof that it did. Collection agencies sometimes attempt to collect debts (purposely or inadvertently) that a bankruptcy has legally discharged. Without proof that the collection agency received notice of your bankruptcy filing you may still owe the debt. At the very least you’d have a much harder time getting them to stop trying to collect on the debt.

Third, even if the new debt holder does receive notice about your bankruptcy filing, it may not happen fast enough. You have no control when your listed creditor would get around to passing on information about your filing. There would be some delay between the time the creditor receives the bankruptcy notice and when it forwards it. In some situations the timing when the new debt holder receives the bankruptcy information is crucial. See our last blog post for a discussion about this timing issue.

Formally Adding Creditors to Your Schedules After Filing

So instead of relying on your listed creditor to inform the new debt holder it’s better to take the initiative.

First, you can formally add the new debt holder to your bankruptcy schedules, after your original filing. Your lawyer does this through an “amended schedule.” This is generally the safest option. Here’s one local bankruptcy court’s information about this procedure.

You do have to pay a modest additional filing fee (currently $31—see item #4 in the court fee schedule).  Plus your lawyer might charge you for the extra service (although not necessarily).  

Another option may be to contact the debt holder—either yourself or your lawyer—without using an “amended schedule.” This contact may fulfil the requirements of the “actual knowledge” exception. What’s critical is to have appropriate evidence of this contact in case you need proof of it later. There may be timing considerations. Also, you may be required to use an “amended schedule” based on local bankruptcy rules.

 Don’t decide this on your own. Talk with your bankruptcy lawyer for advice about resolving the situation the safest and most cost-effective way.

Debts Sold After Your Bankruptcy Filing

Creditors should not sell or assign your debt after they get notice of your bankruptcy case. At least they shouldn’t without informing the new debt holder about your bankruptcy case.

But sometimes they do sell the debt after getting notice about your bankruptcy case, whether intentionally or out of carelessness. Then the discussion above applies. If your bankruptcy case is still active, your lawyer should probably file an “amended schedule” adding the new debt holder.

The creditor’s sale or assignment of the debt can also occur between the time you file bankruptcy and the time the creditor receives notice of it. It may sell or assign the debt after you file bankruptcy but before it knows about your filing.

Again, the discussion above applies. You could hope that when this creditor gets notice of your bankruptcy filing it will inform the new debt owner. There’s a decent chance that it would do so, since the sale had just happened. Its file on you may still be open or would have just been closed a short time earlier. But again, your listed creditor may still not bother to inform the new debt holder. So, talk with your bankruptcy lawyer as soon as you find out about new debt holder. Remember that timing can be extremely important. In most situations filing an “amended schedule to add the new debt holder is the appropriate solution.

 

Creditor Not Listed But Knows about Your Case

April 8th, 2019 at 7:00 am

Usually if you don’t list a debt, it doesn’t get discharged.  An exception is if the creditor still learns about your case, on time. 

 

Last week’s blog post was about the importance of listing all debts in a bankruptcy case to write them off. Debts “neither listed nor scheduled” in the bankruptcy documents are not discharged (legally written off). Section 523(a)(3) of the Bankruptcy Code.

Special Scenarios

This rule raises a number of practical questions. Here are some common situations:

  1. You don’t list a debt but the creditor finds out about your bankruptcy some other way.
  2. Your debt has been sold or assigned to a collection agency without your knowledge
  3. You don’t have good records of your debts and you may not know some of their names and addresses.

Today we address the first of these.

Creditor Knows About Your Bankruptcy Case

If you don’t list a debt it’s still covered by your bankruptcy case if that creditor knows about the case. The Bankruptcy Code says a debt is not discharged “unless such creditor had notice or actual knowledge of the case.”  Section 523(a)(3)(A) and (B)

This doesn’t mean that you can avoid listing a creditor on your debt schedules because you know it will find out about your case some other way.

First, what if the creditor doesn’t actually find out or claims that it didn’t? You could end up owing the debt. It’s much safer to list the debt in your bankruptcy documents.

Second, you are required to list all your debts. Bankruptcy is not just about you and that one creditor.  If you want the benefits of bankruptcy you must play by the rules, which include listing all your debts.

If you have any reason for not wanting to list a debt, talk with your bankruptcy lawyer. There is usually a workable solution to your concerns.

Must Know about Your Case “In Time”

There’s an important condition to this “notice or actual knowledge” exception. Your creditor needs to learn about your case in time to participate in it.

So what’s the deadline for your creditor to learn about your case if you don’t list its debt?

There are 3 possible different deadlines for 3 different kinds of cases.

1. Proof of Claim Deadline

First, some bankruptcy cases give creditors the opportunity to file a “proof of claim.” That’s a document a creditor files at bankruptcy court documenting what it believes you owe. In Chapter 13 “adjustment of debts” cases creditors file proofs of claim to receive any money through your payment plan. In “straight bankruptcy” Chapter 7 “asset” cases creditors file proofs of claim to possibly share in the liquidation of any non-exempt (unprotected) assets. In these cases the bankruptcy court mails out a formal notice giving a strict deadline to file proofs of claim. 

In these cases your unlisted creditor must learn about your case in time to be able to file a proof of claim. Section 523(a)(3)(A).

2.  Creditor Objection Deadline

Second, sometimes a creditor has grounds to object to the discharge of its debt on the basis of your fraud or similar bad action in the incurring of the debt. This can happen in either a Chapter 7 or Chapter 13 case.  In all cases the bankruptcy court mails creditors a notice of the strict deadline to file an objection. 

In these cases your creditor must learn about your case in time to be able to file such an objection. Section 523(a)(3)(B).

3. Possibly No Deadline

Third, in other bankruptcy cases neither of the two situations above applies. In fact that covers most Chapter 7 cases. Most have no assets to distribute because everything the debtor owns is exempt, or protected. The case is a “no asset” case. With nothing to distribute, the court does not ask creditors to file proofs of claim. So there’s no deadline to do so. Also, most creditors have no grounds based on fraud or similar bad actions to object to the discharge of its debt. So any deadline to file such an objection doesn’t apply. So what’s the deadline for an unlisted creditor to learn about your case so that its debt is discharged?

In some parts of the country there is essentially no deadline in these kinds of cases. If you find out at any time about a debt you didn’t list in a “no asset” Chapter 7 case, you or your lawyer may be able to simply inform the creditor and the debt is covered in your case. The debt is then included in the discharge of debts that you received in your case. That may be true even if your case is already completed.

But because the statute does not directly address this situation, your local court may interpret it differently. You might still owe the debt because you didn’t give the creditor notice about your bankruptcy. Again, talk with your bankruptcy lawyer as soon as you learn about a debt that you forgot to include for advice about your specific options.

 

Debts You Don’t List in Your Bankruptcy Case

April 1st, 2019 at 7:00 am

If you don’t list a debt in your bankruptcy case, and don’t add it in on time, it may not be written off.  So carefully include all debts. 

 

Supposed to List All Creditors 

You can’t pick and choose which debts to include in your bankruptcy case. The U.S. Bankruptcy Code says that the first duty of a bankruptcy debtor is to provide “a list of creditors.” Section 521(a)(1) of Bankruptcy Code. That list includes secured, priority, and unsecured debts, which you put on Schedules D, E and F, respectively. As these Official Forms state clearly, you must

  • “List All Secured Claims”
  • “List All of Your Priority Unsecured Claims”
  • “List All of Your Nonpriority Unsecured Claims”

In the Declarations page you declare “Under penalty of perjury” that the “schedules filed with this declaration… are true and correct.” That page includes the very stern warning that “Making a false statement … can result in fines up to $250,000, in imprisonment for up to 20 years, or both.”

Truthfully, that is an overly stern warning because penalties like that simply don’t happen in the consumer bankruptcy context. Not for not including a debt!

The point is that it’s a federal crime to intentionally lie on your bankruptcy documents. So you need to list all your debts. Talk with you bankruptcy lawyer if you believe you have a reason for not listing a debt. There’s usually a practical solution to your concerns.

Unlisted Debts Not Written Off

Today’s blog post is not so much about intentionally not listing a debt but doing so inadvertently. If somehow you don’t include a debt in your bankruptcy schedules you risk owing that debt after your case is over.

In the last 5 weeks we’ve covered the following categories of debts not written off in bankruptcy:

  • Criminal fines and restitution
  • Income taxes
  • Child and spousal support
  • Student loans
  • Damages arising from driving intoxicated

Debts “neither listed nor scheduled” in a debtor’s bankruptcy documents are another category of debts not written off. Section 523(a)(3) of the Bankruptcy Code.

If You Forgot a Debt

If you didn’t include a debt in the schedules filed by your bankruptcy lawyer, you can often add it later. But you may need to act quickly.

Figuring out your deadline to add a missing creditor is somewhat tricky. It depends on the nature of the debt and the nature of your case.

The Deadline(s) to Add a Debt

First, if the debt is of the kind that the creditor could object to the writing off of the debt based on certain bad actions by you (for example, lying about your financial situation to acquire the debt), then there is a short, strict deadline. You have to add the debt to the case in time for the creditor to have time to object.  The objection deadline is usually about 3 months after you file your case. So you’d have to add the debt a bit before that. Section 523(a)(3)(B) of the Bankruptcy Code.

Second, if your case gives the creditors the opportunity to get paid something through your bankruptcy case, you have a different deadline to add a debt. Most Chapter 7 “straight bankruptcy” cases don’t give most creditors the right to receive anything from the case. There are no assets to distribute to creditors (when all a debtor’s assets are “exempt,” or protected). If there ARE assets to distribute (because some asset(s) are not exempt), the bankruptcy clerk sends out a notice providing a deadline for creditors to ask for a share of the assets. Creditors do so by filing a “proof of claim” documenting their debt. So in this situation you have to add a debt a bit before that deadline. Section 523(a)(3)(A) of the Bankruptcy Code.

In Chapter 13 “adjustment of debts” cases usually the debtor pays some portion of most or debts. Within a couple of weeks after you file a Chapter 13 case the clerk sends out a notice giving creditors a deadline to file proofs of claim. You have to add a debt a bit before that deadline.

Other Scenarios

What if you may owe a debt but don’t know that you may? For example, someone thinks you’ve caused them some injury or damages but hasn’t told you yet.

Or what if you’ve lost track of a debt or debts because you’ve moved and lost your records? If the debt is not on your credit report, you may have no way to recall and list the debt. Can you write off this debt?

Also, does it matter if a creditor has somehow found out about your case even though you neglected to list the debt?

Finally, what if the debt has been sold from one debt collector to another without your knowledge? How can you list a debt in order to successfully write if off if you don’t know who you owe?

We’ll cover these other scenarios next week.

 

Bankruptcy Writes Off Vehicle Accident Claims, Unless Intoxicated

March 25th, 2019 at 7:00 am

Bankruptcy writes off claims against you from a vehicle accident for personal injuries and property damage, IF you weren’t intoxicated. 

 

Vehicle Accident Claims

If you had a vehicle accident, you could owe many kinds of debts from it.  You could be liable for any injured party’s current and future medical bills, loss of wages, pain and suffering, and other forms of damages. You could owe for property damage to vehicles and also to any building or traffic barriers or signs.

Your insurance may cover all of these obligations. Of course if you have no insurance, it’s all on you. More likely you have insurance but not enough. Especially if you have only the legal minimum coverage, a major accident and/or one with multiple vehicles could easily result in damages more than your insurance limits.  Then you’d be on the hook for everything insurance doesn’t cover. That could amount to tens or even hundreds of thousands of dollars.  

Bankruptcy would usually write off (“discharge”) whatever you’d owe.

Accident Claims of Unknown Amounts

It doesn’t matter if you don’t know how much you’ll owe. Often you don’t until many months or sometimes even years after the accident. As long as you file bankruptcy after the accident, all claims from the accident are covered by your bankruptcy case.  

Bankruptcy law makes that clear.

Bankruptcy discharges most debts. The U.S. Bankruptcy Code defines a “debt” as a “liability on a claim.”  In other words, you have some legal obligation to somebody.

But that legal obligation does not need to be reduced to a fixed dollar amount. A “claim” is defined as a “right to payment, whether or not… liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed… 

“Unliquidated” means that the amount of the claim is unknown. For example, medical expenses are still accruing. “Contingent” means that the event that triggers whether or not you are liable has not yet happened. For example, a dispute about whether somebody else’s insurance covers the claim has not yet been resolved. “Disputed” means that a question remains whether the claim against you is legally valid. For example, the cause of the accident is still being litigated.

In all these non-fixed-debt situations, bankruptcy would still usually discharge any debts related to claims arising out of the accident.

The Intoxication Exception

However, bankruptcy does not write off accident claims if you were driving intoxicated.

Specifically, regular Chapter 7 bankruptcy “does not discharge an individual debtor from any debt… for death or personal injury caused by the debtor’s operation of a motor vehicle… if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance.” Section 523(a)(9) of the U.S. Bankruptcy Code.

This applies just as much to Chapter 13 “adjustment of debts” because it incorporates the same language. Section 1328(a)(2) of Bankruptcy Code.

3 Practical Twists

1) Only Applies to Unlawful Operation

Notice that this exception only applies if your alleged intoxication made your “operation of a motor vehicle… unlawful.” So this raises some questions if you were arguably intoxicated but weren’t so charged. Your bankruptcy lawyer could argue your operation of your vehicle was not “unlawful.” So the resulting accident claims should be written off in bankruptcy.

On the other hand, there may be circumstances in which a person isn’t charged but was still intoxicated under the law. The accident may have happened in an isolated place and the police didn’t arrive until hours later. Even if you weren’t cited, the injured party could still try to bring evidence that you were driving unlawfully. For example, there could be convincing evidence based on how much you drank and when.

2) Property Damage

The Bankruptcy Code language that creates this exception to discharge refers only to debts “for death or personal injury.” This language does not cover property damage. So can you discharge property damage debts from an intoxicated accident?

Maybe. But there is another exception to discharge that does apply to property damages. Bankruptcy law excludes from discharge any debt “for willful and malicious injury by the debtor to another entity or to the property of another entity.” Section 523(a)(6) of the Bankruptcy Code.

But if you have an accident while intoxicated the injuries caused weren’t intentional. So they weren’t willful, right?

It may depend on your specific facts, and especially on how the bankruptcy courts interpret the law locally. Bankruptcy is federal law but on close questions could be applied differently in different regions of the country. If you have any debts from any accident make sure you have a particularly experienced bankruptcy lawyer representing you. He or she will advise you about the law in your bankruptcy court.

3) Boating and Flying Accidents

We’ve been discussing driving while intoxicated but the discharge exception also applies to intoxicated boating and flying.

Bankruptcy does not “discharge an individual debtor from any debt. .. for death or personal injury caused by the debtor’s operation of a… vessel, or aircraft… if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance.”

Boating and flying are covered by completely different laws, so what’s unlawful is completely different. In state boating laws the blood alcohol concentration amounts may be different, as well of the effect of the operator’s age. Under federal aviation law it is illegal to operate an aircraft:

  • “within 8 hours after the consumption of any alcoholic beverage”
  • with “an alcohol concentration of 0.04% or or greater in a blood or breath specimen”
  • “while using any drug that affects the person’s faculties in any way contrary to safety”

Code of Federal Regulations, Title 14, Section 91.17

 

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.  

Writing Off Debts with Bankruptcy

February 11th, 2019 at 8:00 am

Bankruptcy is about writing off or “discharging” debts. The timing of discharge is quite different in Chapter 7 and 13; both are permanent.  


The main goal of most consumer bankruptcy cases is to get a fresh financial start through writing off debts.  In bankruptcy the legal term for write-off is “discharge.”

In virtually all successful Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” cases there will be a discharge of some or all of your debt.

In Chapter 7

People file Chapter 7 cases mostly to get a quick discharge of their debts. That is, the discharge of those debts that can be discharged, and that they want discharged.

Most debts qualify for discharge. We’ll dig into those that don’t next week.  In the meantime Section 523 of the U.S. Bankruptcy Code covers “Exceptions to discharge.”

You may not want to discharge certain select debts that are secured by something you want to keep. Possible examples are your vehicle loan and home mortgage. You may want to formally “reaffirm” such debts—agree to continue to be liable in return for keeping the collateral. See Section 524(c) of the Bankruptcy Code. You definitely want to discuss thoroughly whether you should reaffirm any of your debts with your bankruptcy lawyer.

The big benefit of Chapter 7 is speed. Most cases finish within 4 months of filing, and do so with a court order discharging your debts. Rarely, the debtor has to give up some asset(s) to get the discharge. Here is an official Chapter 7 Order of Discharge that would come at the end of the case.

In Chapter 13

The road to discharge is much longer under Chapter 13. Plus most, though not all, cases require paying something to your creditors before discharge.

Whether and how much you pay depends on a bunch of circumstances. Chapter 13 involves proposing and getting bankruptcy court approval of an official plan of payments. That plan usually gives you 3 to 5 years to do what you need to do. Often that includes paying special debts such as “secured” and “priority” ones that handles for you much better than under Chapter 7. The “general unsecured” debts usually only get paid any money that’s left over. (See our last blog post for descriptions of these 3 main categories of debt.)

Only after your successful completion of this payment plan do you get a discharge of all or most of your remaining debts. Here is an official Chapter 13 Order of Discharge that would come at the end of the case.

What Is the Exact Legal Effect of the Discharge of Debts?

If you look at either the Chapter 7 or Chapter 13 Order of Discharge linked to above you’ll notice in both the pertinent language is extremely short and sweet:

IT IS ORDERED: A discharge under [the pertinent section of the Bankruptcy Code] is granted to [the debtor].

The legal effect of this discharge is described in Section 524(a)(2) of the Bankruptcy Code as follows:

“A discharge… operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor…  .”

What does this mean? There’s a short Explanation of Bankruptcy Discharge in the two Orders of Discharge linked to above, with both containing the following language:

Creditors cannot collect discharged debts

This order means that no one may make any attempt to collect a discharged debt from the debtors personally. For example, creditors cannot sue, garnish wages, assert a deficiency, or otherwise try to collect from the debtors personally on discharged debts. Creditors cannot contact the debtors by mail, phone, or otherwise in any attempt to collect the debt personally. Creditors who violate this order can be required to pay debtors damages and attorney’s fees.

The discharge court order is permanent, and the injunction that flows from it is permanent. Because of the penalties, most creditors are careful to comply. If you have any indication that any of your creditors is not complying, tell your bankruptcy lawyer.

 

Our next blog post will get into the special kinds of debts that may not get discharged.

The Surprising Benefits: Fraud Debt Collections in Bankruptcy

July 16th, 2018 at 7:00 am

Being accused of defrauding a creditor is unusual in consumer bankruptcy cases. A creditor would have to jump through significant hoops. 

 

Most Debts are Discharged (Permanently Written Off) in Bankruptcy

The federal Bankruptcy Code has a list of the kinds of debts that are not discharged. This list details the conditions under which these kinds of debts don’t get discharged. (See Section 523 on “Exceptions to discharge.”)

Essentially, all your debts get discharged unless any of them fit one of the listed exceptions.

The Fraud Exception

One of the most important exceptions to discharge is the one stating that debts, “to the extent obtained, by… false pretenses, false representation, or actual fraud,” might not be discharged. (Section 523(a)(2)(A) of the Bankruptcy Code.)

This is an important exception to discharge because it could apply to many different kinds of debts. The other exceptions to discharge apply to very specific categories of debts. For example, these other exceptions include child and spousal support, various taxes, and student loans. But the fraud exception could apply to just about any debt if it was incurred in a fraudulent way.

What Makes for a Fraudulent Debt?

Your creditor would have to demonstrate that its debt should not be discharged because you incurred that debt fraudulently. If the creditor fails to do so the debt WILL get discharged and you’ll no longer legally owe it.  

To avoid discharge of the debt, the creditor would have to present evidence and prove EACH of the following:

  1. you made a representation
  2. which you knew at THAT time was false
  3. you made that representation for the purpose of deceiving the creditor
  4. the creditor relied on this representation
  5. the creditor was damage by your representation.

For example:

  1. a person gets a loan by representing that he or she has a certain amount of income
  2. while knowing that income amount was inaccurate
  3. with the purpose of fooling the creditor into making the loan
  4. resulting in the creditor relying on this income information in making the loan
  5. and losing money when the person didn’t pay back the loan

What Happens When a Creditor Alleges Fraud

Proving all five of these necessary elements often isn’t easy. So creditors tend not to object unless they believe they have a strong evidence of fraud. In the vast majority of consumer bankruptcy cases no creditors raise any fraud-based challenges.

When a creditor does raise such a challenge it does so in a specialized lawsuit in the bankruptcy court. This “adversary proceeding” usually focuses directly on whether the creditor can prove the five elements of fraud.

Such adversary proceedings almost always get settled. That’s because the amount of money at issue doesn’t justify the expense in attorney fees and other costs that can accrue quickly for both sides.  

Staying Allegedly Fraudulent Debts

The “automatic stay” imposed against virtually all creditor collection action also applies to allegedly fraudulent debts. If the creditor has alleged fraud prior to your bankruptcy filing, the filing will at least temporarily stop all collection on the debt. The “automatic stay” stops “any act to collect, assess, or recover a claim against the debtor.”  (Section 362(a)(6) of the U.S. Bankruptcy Code.)

Then, as mentioned above, the debt will either get discharged or not. If the creditor doesn’t file an adversary proceeding in time, the debt DOES get discharged. If the creditor files an adversary proceeding but then doesn’t prove fraud, the debt is discharged.

On the other hand, if the creditor does prove fraud the debt is not discharged and the creditor can then pursue the debt. It gets a judgment stating that the debt is not discharged and collectible. Then the creditor can use all the usual collection methods to collect the debt.  

However, because these matters are usually settled, the settlement usually includes an agreed payment plan. So in the unlikely event that a creditor DOES allege fraud against you, files a timely adversary proceeding, AND convinces the bankruptcy judge that all the elements of fraud were present, you would still very likely have a workable way to pay the debt without worrying about being hit by unexpected collection actions.

 

Two More Creditor Challenges to the Automatic Stay

February 23rd, 2018 at 8:00 am

A creditor might want to pay a claim through your insurance, or finish a lawsuit to establish that you got the debt through fraud.  

 

“Relief from the Automatic Stay”

Our last blog post got into some reasons that creditors ask for “relief from stay” other than to repossess collateral.

The “automatic stay” is one of the biggest benefits you get for filing bankruptcy. It “stays”—legally stops—virtually all creditor collection actions right away when you file a bankruptcy case. The automatic stay protects you, your assets, and your income from creditors. It does so permanently in many circumstances.

But there are exceptions, when creditors can ask for permission to pursue a debt, and may get that permission.  So it’s important to know the circumstances in which a creditor would be able to get “relief from stay.”

Last time we explained two of those circumstances, allowing a creditor to finish a legal proceeding against you to determine whether you are liable on a debt, and if so how much you owe. Now here are two other circumstances where creditors may get “relief from stay.”

1. Getting Paid Insurance Proceeds  

When you file bankruptcy you get protection from creditors to which you are personally liable on a debt. But what if your liability is completely covered by insurance, such as with a vehicle accident? Or what if insurance would at least partially cover the amount of your liability?  

The money to pay the claim is not coming from your pocket but that of your insurance company. Should your bankruptcy filing affect your insurance company’s obligation to pay your liability up to the coverage limits?  Arguably not. An injured person may understandably believe your insurance company should pay your liability regardless of your bankruptcy filing.

But the person allegedly damaged by you can’t pursue you, your assets, or your income because of the automatic stay. However, he or she could file a motion asking the bankruptcy court for permission to pursue ONLY the insurance proceeds. The motion would make clear that the debt would be pursued only against your insurance coverage.  Assuming that the court would agree, it would sign an order granting “relief from stay” for the person to go after your insurance proceeds, but not against you in any other way.

Note that your insurance company likely has a “duty to defend” you in such a situation. So the insurance company and the allegedly damaged person, or their respective lawyers, would likely negotiate the matter. Most likely there would be no lawsuit. Or, if there would be one it would get settled and not go to trial. In the unlikely event that it would go to trial, your insurance company would pay to defend the lawsuit, and would pay out any damages up to the coverage limit. Any damages beyond coverage limits would very likely be written off—discharged in bankruptcy.

2. Determining Dischargeability of the Debt

Most types of debts can be discharged in bankruptcy. But there are quite a few exceptions. Some examples of exceptions are criminal debts, unpaid spousal and child support, recent income taxes, and many student loans. See Subsections 523(a)(1),(5),(8), (13), and (15) of the U.S. Bankruptcy Code.

But more conventional debts may also not get discharged based on how you incurred them. A debt incurred through fraud or misrepresentation usually can’t be discharged. See Subsections 523(a)(2) and (4) of the Bankruptcy Code. However, unlike the above exceptions of criminal and support debt, fraud-based debt IS discharged unless the creditor proves the fraud. Then if the creditor would allege fraud, you’d have the opportunity to dispute it.

The bankruptcy court usually decides such fraud-related disputes. But what if at the time of your bankruptcy filing there’s already a state court lawsuit addressing that question?

Just as with the insurance-based circumstance above, your bankruptcy filing would stop that lawsuit from proceeding. But then the creditor could ask for relief from stay to allow the lawsuit to go ahead.

The bankruptcy court might allow the state court to finish deciding whether the debt was incurred through fraud. Or the bankruptcy court might want to decide that issue itself.  Likely it would focus is which court would be more efficient than deciding this issue. And that would likely turn mostly on whether the state court was actually deciding the fraud issue (and not just whether you were merely liable in the debt) and on how close the state court was to a resolution.

 

Exceptions to the Discharge of Debts in Chapter 7

December 15th, 2017 at 8:00 am

Often all your debts are discharged—legally written off—in Chapter 7. But some you might want to pay, or might not be able to discharge. 

 

Two blog posts ago we ended by saying that most general unsecured debts get legally written off—“discharged”—in a Chapter 7 bankruptcy case, but that there are some exceptions. We’ll get into those exceptions now. These exceptions include all types of debts—general unsecured, secured, and priority debts.

Definitely Not Discharged vs. Might Not Get Discharged

When you file a Chapter 7 “straight bankruptcy” likely your main objective is to discharge your debts and move on.  The point is to get a fresh financial start. So when you’re considering your options you need to know whether you will still owe any of your debts after finishing bankruptcy.

Debts Definitely Not Discharged

You might still owe debts afterwards that you’ll know in advance you’ll owe. These include two types—those you’ll still owe voluntarily and those you’ll owe whether you want to or not.

Voluntarily Not Discharged

Why would you voluntarily agree to owe a debt after bankruptcy when the main point of Chapter 7 is to wipe out all the debts you can?  You’d do it to get something worthwhile in return.

What would you get in return? The debts most commonly retained are debts secured by collateral, such as a home, vehicle, or something else worth keeping. In return for continuing to make payments and owe the debt, you get to keep the collateral. And you get the sometimes important benefit of being able to quickly start rebuilding your credit record.

In these situations you’d usually formally “reaffirm” the debt. You’d sign a “reaffirmation agreement” to remain legally liable on the debt in return for keeping the collateral. See Section 524(c) of the U.S. Bankruptcy Code.

Or, rarely, you might just want to keep paying a debt, simply because you want to. This is usually done with special, usually more personal debts, such as one owed to a relative. It’s usually based on a moral or family obligation, not a binding legal one. As the Bankruptcy Code says, “[n]othing… prevents a debtor from voluntarily repaying any debt.” Section 522(f).

Not Discharged by Force of Law

There are also debts you simply can’t discharge in a Chapter 7 case because the law says you can’t. Here are the most common ones:

  • Child and spousal support can never be discharged, and most other divorce-related obligations can’t be under Chapter 7. Section 523(a)(5) and Section 523(a)(15).
  • Income tax debts can’t be discharged, unless they meet a list of conditions (mostly related to how old the tax is). Section 523(a)(1)
  • Most (but not all) student loans can’t be discharged unless imposing an “undue hardship” on the debtor. Section 523(a)(8)
  • You can never discharge criminal fines and restitution (except sometimes minor traffic infractions that are not considered “criminal.” Section 523(a)(7) and (13)

Debts that Might, or Might Not Get Discharged

There’s one more set of debts that WILL get discharged in a Chapter 7 case, UNLESS all three of these happens:

1. The creditor files a formal objection to the discharge at the bankruptcy court

2. That objection is filed on time—within 60 days after the “First Meeting of Creditors”

3. The court determines that the debt should not be discharged

As long as the creditor was included on your schedules of creditors and the creditor does not object in time, the debt is discharged just like any other debt.

The bankruptcy court determines whether the debt gets discharged based on whether the creditor convinces the court that the debt meets one of 3 sets of conditions. These conditions include whether you obtained the debt through:

1. Misrepresentation or fraud on the creditor (Section 523(a)(2))

2. Fraud while acting as a fiduciary (such as an executor of a decedent’s estate), embezzlement, or larceny (theft) (Section 523(a)(4))

3. “Willful and malicious injury” against someone or something (Section 523(a)(6))

Again, if the creditor does object on time but does not show that one of these conditions apply, the debt still gets discharged.

Because you don’t know for sure whether a creditor will object, and if one does how the judge will decide, this is a debt that you won’t know in advance whether it will get discharged. But of course you’d usually know if there is a risk that any of your creditors have a basis for raising such an objection. If you have any inkling that one does, talk with your bankruptcy lawyer about it. You’ll find out whether you or not you should be concerned. Often you’ll learn that your risk that the creditor would object is actually quite low. However, sometimes you’ll just have to wait to see if the creditor objects by the deadline.

 

This is just an outline of debts that don’t or may not get discharged. We’ll look more closely at these in the upcoming blog posts.

 

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