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Archive for the ‘Bankruptcy Code’ tag

How Has the Coronavirus Pandemic Affected Bankruptcy Cases?

May 15th, 2020 at 11:54 am

TX bankrutpcy lawyer, Texas bankruptcy laws, Nobody wants to file for bankruptcy. Even though you can discharge your debts so that you are no longer legally liable for them, there are a few negative consequences that come from filing for bankruptcy, including a hit to your credit score. However, if you are one of the millions of Americans who are struggling financially, bankruptcy may be the solution. The current coronavirus pandemic has hit the U.S. economy hard, causing unemployment to soar to levels unseen since the Great Depression. The coronavirus has affected many things, including making temporary changes to the bankruptcy code.

The CARES Act

Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in response to the economic crisis emerging from the pandemic. Valued at more than $2 trillion, the CARES Act was monumental for the U.S. as it is the largest stimulus package to become enacted in the history of the country. One of the most popular benefits the Act provides is the economic impact payments that are given to most households and individuals. Single tax filers will receive $1,200, while married couples who file jointly will receive $2,400. Each child that an individual or married couple has that is under 17 will receive an additional $500.

The economic impact payments have greatly helped those who have lost their jobs or have had their hours reduced because of the pandemic. However, for many households, the economic impact payments may not be enough to make the monthly obligations for all of their debts. To file for bankruptcy, you have to meet certain income requirements, which has led some to worry about how the economic impact payments will affect their status.

Temporary Changes to the Bankruptcy Code

When an individual files for bankruptcy, their income and assets are examined to determine if they are eligible for bankruptcy. To ensure all bankruptcy trustees are on the same page, the U.S. Trustee Program (USTP) issued a notice to address these issues that may arise because of the pandemic.

The notice stated that the economic impact payments are not to be included as “current monthly income” or “disposable income.” More specifically, the economic impact payments should not be used in any calculations to figure a person’s income and should not be included as a factor in determining whether or not a person can repay his or her debt in Chapter 7 or Chapter 13 bankruptcy. The notice also states that any trustee that attempts to recover the economic impact payments to become a part of the bankruptcy estate must notify the USTP before doing so.

Our San Antonio, TX Bankruptcy Attorney Is Here For You

The idea of getting a bankruptcy can be daunting to some, but sometimes it is the best option. At the Law Offices of Chance M. McGhee, we understand that you may be concerned about your eligibility for bankruptcy with all of the changes that have taken place. Our skilled New Braunfels, TX bankruptcy lawyer can answer any questions that you might have about your eligibility or even just about bankruptcy in general. To speak with an attorney about your case, call our office today at 210-342-3400.

 

Sources:

https://www.justice.gov/ust/file/cares_act_recovery_rebate_notice.pdf/download?fbclid=IwAR1FVLAkidW9nd5F8lAzAJ4EzJLrgj8_Ok-eIXKxvVxJQGH5GBou1d-kui0

https://www.congress.gov/bill/116th-congress/senate-bill/3548/text?q=product+actualizaci%C3%B3n

 

 

A Creditor’s Precautionary Motion about the Automatic Stay

February 26th, 2018 at 8:00 am

A creditor might file a motion to avoid violating the stay, or to get permission to take some action other than collect a debt.   

 

In the last three blog posts we’ve covered five reasons why creditors ask for “relief from the automatic stay.” The first one is by far is the most common.  Creditors ask for “relief from stay” to take back collateral, or to establish payment and other terms that you must meet to avoid losing the collateral.

The other four reasons were to get permission to finish a lawsuit or other proceeding to determine:

  1. whether you owe any debt to the creditor
  1. the amount of that debt, assuming you owe something
  2. whether you owe a debt which can be paid by insurance (instead of you personally)
  3. whether the debt you owe can be discharged (written off) in bankruptcy     

Today we cover two more reasons that a creditor may ask the bankruptcy court for “relief from stay.” These tend to be precautionary—arguably the creditor or other party could act without bankruptcy court permission. But because of the risks of potentially violating the automatic stay the party first asks for permission.

So, a party could file a motion for relief from stay

  1. to get a court determination whether the creditor’s intended actions would violate the automatic stay
  2. to get permission to take some other action against you not involving collecting a monetary obligation

Penalties for Violation of the Automatic Stay

When a creditor or other party learns that you’ve filed a bankruptcy case, it knows that it can no longer take collection action against you to collect any debt. If it does take such action it would likely be in violation of federal law and may have to pay damages.

The U.S. Bankruptcy Code (at Section 362(k)(1)) says that

an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.

In other words there can be significant financial penalties for taking action against you in violation of the automatic stay.

1. Avoiding Violation of the Automatic Stay

The problem is that sometimes it’s not crystal clear whether a certain action by a creditor would violate the automatic stay or not. Bankruptcy Code Section 362 about the automatic stay has 8 subsections about the kinds of actions that bankruptcy stays (stops). It has 28 exceptions about the kinds of creditor actions that the automatic stay does not stop. The entire code section contains about 6,500 words—lots of potential for confusion.

So how does a creditor or other adversary of yours avoid the potentially serious penalties for violating the stay? It can file a precautionary motion for relief from stay to put the issue before the bankruptcy court. The creditor/adversary doesn’t act against you until after getting the court’s determination that it is acting legally.

For example, assume that you file a bankruptcy case while you are in the midst of a divorce. Your ex-spouse wants to finish the divorce proceeding regardless of your bankruptcy filing. The Bankruptcy Code says it’s not a violation of the automatic stay to finish a divorce proceeding. However it IS a violation to the extent that “such proceeding seeks to determine the division of property that is property of the estate.”  (Section 362(b)(2)(A)(iv).)

So your ex-spouse may file a precautionary motion to find out if the property to be divided is included in “property of the [bankruptcy] estate.” He or she wants to know how to go forward with the divorce without violating the automatic stay.

Note that you can simply not respond to such a motion if you’re fine with the action your adversary proposes. Then the bankruptcy judge will likely give the adversary the clarification it needed. If you don’t object your adversary will more likely get what it is requesting.

But if you do want to object, you respond through your bankruptcy lawyer to the creditor’s motion. The judge then decides whether the creditor’s proposed action would be a violation of the automatic stay. And if it would be a violation, the court usually also decides whether the adversary is still entitled to relief from stay to proceed with his or her action.

2. Permission to Take Action Other Than to Collect a Debt

Similarly, a creditor may ask for relief from stay to take some action separate from collecting its debt. It is essentially asking to take some action other than debt collection, and wants to be sure it can.

When you enter a contract with a creditor, you often have contractual obligations beyond just paying the debt. For example, if you’re behind on rent payments on an apartment when you file bankruptcy, you owe a debt. The landlord cannot pursue you on that debt because of your bankruptcy filing. But it may want to evict you so that it can rent it to another tenant. So the landlord could file a motion for relief from stay to get permission to evict you. That motion would make clear that the landlord is NOT asking for or getting permission to collect the back rent. It’s just asking for permission to proceed with an eviction-only lawsuit. If the landlord succeeded in that motion, the court’s order granting the permission would also be limited to the eviction proceeding, and would not allow collection of the back rent.

(There are special rules about the automatic stay involving residential rentals. So be sure to discuss this with your bankruptcy lawyer if it pertains to you. Also, see Section 362(b)(22 and 23) of the Bankruptcy Code and our recent blog posts about this.)

 

“Discovery” during a Nondischargeability Dispute with a Creditor

March 22nd, 2017 at 7:00 am

“Discovery” covers all the methods used to get at all the relevant facts in a dispute with a creditor about the discharge of a debt. 


Our last blog post was about the beginning of the “adversary procedure” for deciding whether a disputed debt gets discharged. Like many other legal procedures, it starts with a formal summons and complaint, here usually filed by a creditor.

(Either a creditor or debtor can file a complaint. But since we are focusing on debts that get discharged unless a creditor objects, for our purposes we assume that it’s the creditor filing the complaint and the debtor responding to it.)

The debtor responds to the complaint with either a motion to dismiss or an answer. The motion to dismiss is appropriate when the creditor’s complaint does not make an argument clear enough to respond to. An answer states step by step what, if any, parts of the complaint the debtor agrees with and what parts the debtor does not.

So then the scene is set. Both sides have made their basic arguments clear—what they dispute and what they don’t.

The next step is to get at the facts. That’s the purpose of “discovery.”

The Discovery of the Facts

“Discovery” refers to the procedure for discovering the facts that are relevant to the dispute.

The dispute is whether or not a debt gets discharged—permanently written off in bankruptcy. In the categories of debts we are considering here, the creditor must prove certain facts or the debt IS discharged. The creditor has the “burden of proof.”

Broadly speaking, the creditor has to show that the debtor intentionally lied when incurring the debt. (Section 523(a)(2) of the U.S. Bankruptcy Code.) Or the debtor caused “willful and malicious injury” to someone or their property. (Section 523(a)(6).) (There is much more to this, and about what facts must be proven, but this is enough for today’s purposes.)

There are two major steps involved in “discovery” under federal bankruptcy rules.

Automatic Disclosure Requirements

There is a fair amount of information that both sides must automatically disclose to the other:

  • the names of potential witnesses and lists of records, such as relevant documents, emails, and information on computers and in other electronic form
  • contact information of all witnesses and experts
  • copies of the documents and the records, or a way to get access to them

(See Federal Rules of Bankruptcy Procedure (FRBP) 7026 and Federal Rules of Civil Procedure (FRCP) 26(a) about “Required Disclosures.”)

The point of this step is to get most of the facts out quickly and efficiently. One benefit is so that the parties can determine whether their case is as strong as they first thought. Adversary proceedings often settle at this stage for this reason.

Additional Discovery Methods

Both sides can request and get more information through a number of methods. These requests have to relate to the arguments being made in the complaint and other pleadings. These methods allow the parties to:

When all the facts have been put on the table through whichever of these methods, and if the parties do not settle the matter, the adversary proceeding is ready for trial. We’ll finish with that in our next blog post two days from now.

 

The Procedure to Determine whether a Debt Should be Discharged

March 20th, 2017 at 7:00 am

If you decide not to settle but rather fight a creditor trying to make you pay a debt that you want to discharge, here’s what happens. 

 

Last time we got into the three practical options if a creditor objects to the discharge of one of your debts. Two of those options involve settling the dispute, either immediately or after learning the strengths and weaknesses of your position. The third option is having the bankruptcy judge decide whether or not the debt should be discharged.

That involves going through the entire adversary procedure, the bankruptcy court’s version of a lawsuit, all the way to the judge’s ruling and judgment. (There is no jury in bankruptcy adversary proceedings.)

If you go all the way through an adversary proceeding, what are the steps this involves?

The Start

An adversary proceeding to decide whether a debt gets discharged starts like any other lawsuit. The creditor files a complaint in the bankruptcy court laying out why it thinks the debt should not be discharged.

A debtor can also start the process, filing a complaint showing why the debt should be discharged. This happens with the kinds of debts that wouldn’t be discharged without a court determination that they are. This applies to establishing “undue hardship” to qualify to discharge a student loan. It may also apply to showing that an income tax return was not filed to evade taxes.

But for today’s and the next few blog posts we’re assuming that the creditor is filing the complaint. It’s the kind of debt that would be discharged unless the creditor complains, and does so on time. So it’s usually better for you just to wait and see whether any creditor is going to raise any objections. Often even when they threaten to do so they don’t because of their costs and risks if they do.

The Summons and Complaint

The complaint lays out the creditor’s argument in a legalistic, point-by-point fashion. It states the facts and circumstances why the creditor believes the debt should not be discharged. It ends by asking that the bankruptcy court make a ruling that the debt does not qualify for discharge.

The court issues a summons to inform you of the filing of the complaint, and of your deadline to respond.

The creditor “serves” the summons and complaint on you and on your bankruptcy lawyer. Unlike most lawsuits, this is done by regular mail. Yours is mailed to the address in your bankruptcy filing. This is one good reason to be sure that the court is officially informed of any address changes, and that you monitor your mail carefully.

Responding to the Creditor’s Complaint

If you don’t respond by the stated deadline, the creditor will generally get whatever it is asking for in the complaint. The debt would be declared not discharged and the court would enter a judgment against you saying so.

You and your lawyer have basically two ways to respond to the complaint.

Motion to Dismiss or Compel a More Definite Statement

A complaint may not lay out clearly enough the creditor’s factual and legal argument. It may not make a clear enough case why the debt should not be discharged. It has to give you enough information so that you know what you are defending against.

If not you can ask that the court dismiss the adversary proceeding, unless the creditor fixes the complaint’s deficiencies. If the court agrees and the creditor doesn’t amend its complaint, the court can dismiss the whole proceedings. That sometimes does happen if in the meantime the creditor realizes that it really doesn’t have a good case. Your lawyer may have told the creditor’s lawyer your side of the story, poking holes in the creditor’s argument. The creditor realizes that it’s wasting money, and either pulls out or negotiates a reasonable settlement.

Otherwise the creditor makes the necessary corrections in the complaint and the adversary case moves forward.

Your Answer

If and when the complaint properly lays out the creditor’s argument, you can file an answer. The answer responds point by point to every allegation in the complaint, saying whether you admit or deny each one.

You also have and usually must take the opportunity to provide any defenses to the allegations. These are reasons that may justify or excuse the allegations, and still make the debt dischargeable.

This is also usually the right time to raise any counterclaims. These are any related complaints you may have against the creditor. For example, the creditor may have cheated you in some way in the debt transaction, or in the debt collection process.

It can be crucial to raise defenses or counterclaims at this point in the process. You may be legally prevented from doing so later.  

This is one of the reasons to be completely honest and thorough with your lawyer. It’s important to do so from the beginning of your first meeting with him or her. But to be realistic, you can’t always focus on or remember everything that might possibly be relevant or important in your first meeting or two with your lawyer. But once an adversary proceeding complaint is filed, it’s absolutely necessary that you think through and tell your lawyer everything.

There is nothing that shoots down a creditor’s complaint better than an airtight defense. And sometime there’s nothing that defends you better than taking the offensive with a great counterclaim.

We’ll explain what happens after you file your answer in our next post in a couple days.

 

Bankruptcy in the U.S. Constitution and Statutes

April 4th, 2016 at 7:00 am

Bankruptcy is federal law. The U.S. Constitution has said so from the beginning. Find the Bankruptcy Code in Title 11 of the U.S. Code.

 

If you’re considering bankruptcy and are trying to read up on it, this may help make sense of it.

The U.S. Constitution

The Constitution gave Congress the power “to establish… uniform laws on the subject of bankruptcies throughout the United States.”  (Article 1, Section 8, Clause 4.)  This particular power is near the top of a long list of legislative powers the Constitution granted to Congress.

Why Bankruptcy is in the Constitution

Bankruptcy may seem like a minor issue in the grand scheme of setting up a new nation. But making bankruptcy a federal responsibility instead of a state one actually went to the heart of what the Constitutional Convention of 1787 was trying to address.

Under the earlier Articles of Confederation (written in 1776-77) the states acted in many ways like independent countries, with their own money and their own laws regulating trade with other states, and even with other countries. There was no national court system. The national government had no power to pass laws on interstate commerce, including bankruptcy. So, different states had their own bankruptcy laws, creating intense confusion and conflict among the states and their residents.

Giving the national government power over interstate commerce, including to create a uniform bankruptcy law, was an essential ingredient in economically unifying the country.  

Getting Congress to Use its Constitutional Power

The Constitution gave Congress power to pass “uniform laws on the subject of bankruptcies” but then Congress still had to write and pass those laws.

It’s not just the current Congress that can’t get anything done. For most of the first 110 years under the Constitution there were no bankruptcy laws on the books at all!

Why? Because of gridlock—there was so much disagreement about some of the most basic principles of bankruptcy. In particular there was deep conflict between creditor-dominated states in the Northeast where the major banks were located and states in the South and West populated mostly by debtor farmers and merchants.

So Congress only managed to pass temporary bankruptcy laws to address some of the severe economic downturns that the swept the nation regularly throughout the 1800s. These laws were passed three times, but were all repealed within just a few years. Finally, in 1898 the first “permanent” bankruptcy law was passed, and we’ve had one since then. The current Bankruptcy Code has been in effect since 1979.

The Bankruptcy Code

All the federal statutes are compiled in the United States Code (abbreviated as “U.S.C.”).   It has 51 “Titles,” of which Title 11 covers bankruptcy. It’s commonly called the Bankruptcy Code.

The Bankruptcy Code is divided into nine Chapters. The first three are about general bankruptcy issues, while the remaining six Chapters lay out specific bankruptcy options—Chapter 7, Chapter 11, and so on.  A bankruptcy case is referred to by the Chapter under which it is filed, as in a “Chapter 13” case. (See two blog posts ago for a short explanation of the most relevant Chapters.

The specific statutes within each Chapter are called Sections.

Some Important Sections of the Bankruptcy Code

Here are some noteworthy Sections for consumers and small business owners:

  • Section 341: The “meeting of creditors”—a usually short and straightforward hearing with your bankruptcy trustee which you need to attend; a misleading name because in most cases no creditors attend
  • Section 362: Automatic stay—stops creditor collections once a bankruptcy is filed
  • Section 522: Exemptions—assets protected in bankruptcy; you need to look at your state’s exemption statutes as well as or instead of these federal ones (depending on your state)
  • Section 523: Exceptions to discharge—types of debts that will not or might not be “discharged” (legally written off) in a bankruptcy case
  • Section 524: Effect of discharge—what happens with the legal write-off of a debt, including sanctions for creditors who pursue a debt after its been discharged
  • Section 727: Chapter 7 “means test” and discharge—qualifying for Chapter 7 through your income and sometimes other considerations
  • Section 1322: Contents of plan—what a Chapter 13 payment plan may or must include
  • Section 1325: Confirmation of plan—requirements for getting bankruptcy court approval of your payment plan
  • Section 1328: Chapter 13 Discharge—its requirements and exceptions

 

You’re Now More Likely to Be Paid More Back Wages by Your Bankrupt Former Employer

March 14th, 2016 at 7:00 am

Here’s an adjustment in the law that can benefit you if you are owed wages and/or benefits by a person or business filing bankruptcy.

 

This is the last of a series of blog posts on the effect of changes going into effect on April 1, 2016. These changes are a result of a cost of living adjustment that’s in the federal bankruptcy law. See Section 104(b) of the Bankruptcy Code.

Every one of these blog posts so far have been about these changes would affect you if you were filing a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.” But today’s blog post assumes you’re on the other side of the table, that you are owed money—in the form of back wages and employee benefits—by a former employer that filed bankruptcy.

In this situation you are a creditor of the person or business owing you the wages and/or benefits. But the good news is that you are a creditor who the law treats relatively well. Plus the April 1 cost of living adjustment means that such debts for wages and/or benefits are going to be treated even slightly better.  

Priority Debts for Wages and Benefits

In bankruptcy law a few very select debts are considered “priority” debts that the debtor must pay in full before other unsecured debts are paid anything. Debts for unpaid wages and/or employee benefits meeting certain conditions are “priority” debts. This means that these are much more likely to get paid. (See Sections 507(a)(4) and (5).)

Even better, “priority” debts must be paid by the debtor in a particular order. So the higher priority ones must be paid in full before lower priority ones are paid anything. Among the highest priority debts are those for employee wages and benefits.

In many cases wages and benefits are the highest priority debts that a debtor owes. If the former or current business owner filing bankruptcy is an individual, instead of a corporation, usually only child and/or spousal support arrearage debt, if there is any, has a higher priority.

So if there is any money being distributed to creditors, there’s a good chance that your wage and/or benefits claim will be paid, at least in part.

Not All Wage/Benefits Debts Are Included

For a wage/benefits debt to be given “priority” status you must have earned the wages and benefits within the 180 days before the employer filed bankruptcy. Or if your employer went out of business before filing bankruptcy, you must have earned the wages/benefits during the 180 days before the going out of business.

There’s one more condition, which is where the April 1 cost of living adjustment comes in. There is a cap on the dollar amount of wages and benefits earned during the applicable 180-day period that would be treated as “priority.”

On the wage side that cap has been $12,475 for the last 3 years. It is going up to $12,850. See this announcement in the Federal Register of 2/22/16.

On the employee benefits side, the same dollar amounts apply—$12,475 in benefits earned during the 180 days either before filing or before close of business, going up to $12,850. But here there’s a twist. These amounts that are treated as “priority” are reduced by whatever others amounts are already being paid by the debtor to former employees in wages and other benefits.

“Priority” and “Non-Priority” Wages and Benefits

Any wages/benefits earned outside these 180-day windows or beyond the cap amounts could well be considered a valid debt. Such debts may even be paid in part or even in full in the former employer’s bankruptcy case. But they would not be paid as “priority” debts.

The “priority” portion of the debt would have a much, much better chance of being paid than any “non-priority” portion. Again, that’s because that “priority” portion would be at or very near the head of the line to be paid. In contrast, the non-“priority” portion of the wage/benefits debt would be in the pack with virtually all the other debts. That portion would only be paid if and to the extent there is any money left over after other more important debts are paid.

Conclusion

Regardless what kind of bankruptcy your former or current employer has filed, your back wages and benefits are much more likely to be paid if they fit the conditions for being “priority” debts. But that’s still not a sure thing. If you haven’t already done so, talk with an experienced bankruptcy attorney to understand your rights and to find out what you need to do to get paid.

 

Thanksgiving for the Rule of Law

November 23rd, 2015 at 8:00 am

This Thanksgiving, even in the midst of scary personal financial pressures, there is much to be thankful for.


Everybody can make their own individual inventory of people and situations to be appreciative of Here is a short list of what to be thankful for in the world of bankruptcy:

1. The Rule of Law:

We’re thankful that we live in a country that, for all of its continuous challenges, is a civil society. Without getting into the politics of it all, we can generally rely on our local, state, and national governments to fulfill their basic functions. We don’t live in anarchy. People, from the lowest to the highest, generally try to operate their daily lives following the rules that we have all agreed to live by, our laws.

There are serious challenges to all our institutions—from the U. S. Congress to the U. S. Postal Service. But most of us can generally go about our daily lives without being concerned about being physically harmed by either the police or by other people. Our U. S. Constitution continues, after 226 years, to protect our basic rights. And that includes a system of federal bankruptcy law.

2. The Weak Standing up to the Strong:

We’re thankful that within the laws in general, and in bankruptcy law in particular, the rule of law means that people who are weaker have at least a certain amount of strength and protection.

In the case of bankruptcy, the strength is found in a set of powers with which debtors can push back and get relief from creditors and their debts. For example, the “automatic stay” goes into effect instantaneously when you file any kind of bankruptcy case stopping virtually all collection efforts of creditors. The “discharge” legally writes off most debts forever. These powers undo rights that creditors would normally to enforce contracts and collect debts. Bankruptcy gives you laws that defeat laws that usually help creditors.

That’s pretty extraordinary.

3. Compassion Built into the Law:

We’re thankful that a trait that isn’t often found in the law—compassion—is incorporated into the bankruptcy law.

The evolution of bankruptcy, over the centuries of English and American law, has been towards compassion for the “honest but unfortunate debtor.” An institution that was originally designed as a way for creditors to collect debts has evolved into one mostly used to give relief to debtors.

“Property exemptions” enable debtors in most cases to keep what they have and need. “Reaffirmation” and “redemption” gives options for keeping collateral when doing so is in the debtor’s best interest. The ability of creditors to challenge the “discharge” of debts is usually limited to those situations where there is a good reason that the debt should not be discharged.  

4. No Corruption:

We’re thankful that beyond paying the relatively reasonable filing fees, nobody needs to bribe a court clerk or a judge to get something done. The system is honest and overall fair.

5. Balancing between Debtors and Creditors:

We’re thankful that the bankruptcy laws make a reasonable attempt at balancing the rights and interests of debtors and creditors.

And the system as administered and enforced—all the way from the local bankruptcy court clerk to the U. S. Supreme Court—is done with an earnest attempt to be fair, sensible, and balanced.

6. You Have Choices:

We’re thankful that the result of all of the above is that most people in financial distress have legal options that will bring relief.

Under Chapter 7 “straight bankruptcy” you can usually get immediate relief from creditor pressures. You have the option of surrendering collateral like a vehicle or home and owing nothing, or keeping the collateral and paying for it, sometimes not the full amount. You usually protect everything else you own through “exemptions.” And then almost always after only 3 or 4 months all or most of your debts are permanently discharged.

Under Chapter 13 “adjustment of debts” beyond the immediate relief from creditor collection efforts, this protection lasts the whole 3-to-5-year period that you are in a payment plan. That plan is put together by you and your attorney following a set of rules; creditors have only a limited say about the terms of that plan. The Chapter 13 plan gives you the opportunity to  pay important debts that you either can’t discharge in a Chapter 7 case—such as child support—or which you don’t want to discharge—such as a vehicle loan or home mortgage. You may also qualify for various significant benefits—such as stripping a second mortgage off your home, or doing a “cramdown” of your vehicle loan or other collateralized debt.

In both of these options you generally finish with the elimination of or a huge reduction in debt and a fresh financial start.

We hope the prospect of that helps you have a good Thanksgiving this year, and perhaps a better one next year.

 

Making Sense of Bankruptcy: Using State Property Exemptions in Federal Bankruptcy

August 12th, 2015 at 3:00 am

The U.S. Constitution makes bankruptcy a federal procedure. So why is the amount of assets you can protect different in each state?

 

The sentence we’re explaining today is:

The Constitution gives Congress power to make “uniform Laws” on bankruptcy, yet for much of our history it has had trouble doing so in part because of competition between states’ vs. federal powers, which eventually resulted in a compromise allowing each state to require debtors filing bankruptcy to use that state’s set of property exemptions instead of the federal one.

The Power to “Establish… Uniform Laws on the Subject of Bankruptcies”

From the beginning, and without change throughout our history, the U.S. Constitution has said that Congress has the power “to establish… uniform Laws on the subject of Bankruptcies throughout the United States.” Article 1, Section 8, Clause 4.  The reason this was put into the Constitution was that the Framers wanted to economically unify the states, and for each state to have its own bankruptcy laws and procedures would instead cause conflicts among states and their residents.

This clause in the Constitution about “uniform laws on… Bankruptcies throughout the United States” makes it sound like filing a bankruptcy case should be the same in every state. But in fact two bankruptcy cases with the same facts could play out quite differently in different states. That’s because of two main reasons.

First, there are many areas of law that are reserved by the Constitution to the states ,and those state laws can greatly affect how the federal bankruptcy laws are applied. Some areas of state laws that affect bankruptcies include: personal property and real estate, marriage and divorce, state income and property taxes, insurance, personal injury, criminal, and debt collection. For example, federal bankruptcy law says that all of your assets at the time of filing are part of the “bankruptcy estate,” but it is state law that determines what belongs to you and what belongs to your spouse.

Second, the federal Bankruptcy Code explicitly allows certain aspects of bankruptcy law to be applied differently state by state. Perhaps the most important of these is that each state is allowed to decide whether people filing bankruptcy in that state must use that state’s list of property exemptions or can use the federal one contained in the Bankruptcy Code. Exemptions are a crucial part of bankruptcy law and procedure. They determine whether you can protect all of your assets when you file a Chapter 7 “straight bankruptcy” case, and they affect how much you have to pay to your creditors in a Chapter 13 “adjustment of debts” case. Differences in property exemptions from state to state, and between your state and the federal exemptions can have a big practical effect on your bankruptcy case.

For a rather extreme example involving two neighboring states’ homestead exemptions, you can exempt only $5,000 of value in your home if you live in Mobile, Alabama (Ala. Code Sect. 6-10-2), but if you live just 60 miles to the east in Pensacola, Florida, you can exempt an unlimited amount of value in your home (Art. X, Sect. 4, Fla. Const.).

How did it happen that the supposedly “uniform” bankruptcy laws ended up being applied so very differently in different states?

The Contentious History

Believe it or not this very issue has been fought over about throughout much of our country’s history. In fact it’s arguably part of why we didn’t have ANY bankruptcy law most of our first 110 years or so.  

Through the late 1700s and much of the 1800s the economy went through a series of financial “panics.” During these farmers and merchants, particularly in the southern and western regions of the country, would lose their homes, farms and businesses, often to out-of-state creditors in the northeast. Because of this, laws exempting certain property from creditors were adopted and spread quickly through the South and the Midwest during the 1840s and 1850s.

Three different times during the 1800s Congress passed a set of bankruptcy laws, each time to address one of the reoccurring financial panics. But because of the disagreements among the states, and between the federal government and the state, none of these bankruptcy laws stayed in force for long, expiring or being repealed as soon as the economy improved. With no federal bankruptcy law in effect most of the time, various kinds of state laws tried to fill the gap in various ways, including through property exemptions.

The first “permanent” bankruptcy law was passed in 1898, but it could only muster enough votes in Congress by letting states continue to use their own system of exemptions for bankruptcies filed by their residents.

The Big Compromise

This brings us to the latest total overhaul of federal bankruptcy law in the late-1970s. At that point some in Congress wanted to continue using state exemptions as in the 1898 law, while others wanted a mandatory uniform federal system.  A compromise was struck giving each state a choice: it could either require its residents to use the state’s own set of exemptions, or else let them use either a new set of federal exemptions or the state’s exemptions.

As a result in every state its residents filing bankruptcy can use their state’s exemptions, while 19 states (plus the District of Columbia) have chosen to also give their residents the option of using the federal exemptions. Those 19 states are Alaska, Arkansas, Connecticut, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.

So, that’s why bankruptcies, and particularly property exemptions, can look quite different from one state to another, in spite of the “uniform Laws” language of the Constitution.

 

Floating Check Controversy: Whose Money Is It?

March 23rd, 2015 at 8:18 pm

Texas bankruptcy lawyer, Texas chapter 7 attorney, bankruptcy trustee,According to the Bankruptcy Code, all a debtor’s nonexempt property belongs to the bankruptcy estate and the trustee has the power to collect such property and distribute the money to creditors. These seemingly straightforward provisions can have a significant impact on a debtor’s bank account. Just because there are funds in the account does not necessarily mean that the money belongs to the debtor.

Assume that David Debtor pays his mortgage with a debit card one morning, and files a voluntary Chapter 7 petition a few hours later. Technically, that payment is still in David’s account, because the bank may take several hours, or even several days, to process the transaction. But if David spends the money, he will be overdrawn. If the trustee later files a Section 542(a) motion demanding the money, what happens?

The floating check controversy also occurs in reverse. Bankruptcy debtors sometimes get tax or escrow refunds, win the lottery, receive an inheritance, or experience some other financial windfall. Again, if the trustee files a motion for turnover, what happens?

Dealing with a Motion for Turnover

If you are expecting a windfall, such as a tax refund, declare it as a contingent claim on Schedule B. An additional claim should not affect the outcome of the means test. If you receive an unexpected windfall, such as an inheritance, you can probably amend the schedules to reflect your new found financial gain without materially affecting the course of the bankruptcy. If you are using federal exemptions, these claims are typically not part of the bankruptcy estate, so you can probably keep the funds.

A simple floating check situation may be more complicated. Since the money is gone by the time the trustee files a 342(a) motion, mootness is sometimes a good defense.

Assume that David and Debbie both claim ownership of a house, and the case goes to court. But before the trial, the house burns down. Now, it does not matter who owned the house, so there is nothing for the judge to decide. In the same way, even though the hypothetical mortgage payment may have belonged to the bankruptcy estate, the money is no longer in the account, so the ownership question is moot.

At the Law Offices of Chance M. McGhee, you can have a free consultation with an experienced San Antonio bankruptcy lawyer. Call us today at (210) 342-8400.

Call today for a FREE Consultation

210-342-3400

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