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A Caution about Severing Your Chapter 13 Case from Your Spouse

September 1st, 2017 at 7:00 am

If getting separated or divorced while in a Chapter 13 case, you’ll likely each need a new lawyer for independent advice about what to do.   

 

Last time we explained an important option for spouses filing a Chapter 13 together: “severing” their case into two if they later separate or divorce. That allows each spouse to do whatever they want to do with their side of the case. Each person can either continue in the Chapter 13 case, convert to Chapter 7, or dismiss out of bankruptcy altogether.

You should know about this severing possibility before filing your case because it’s good to know your future options. You need to know how much flexibility Chapter 13 has if your circumstances change. And you need to know the limits on that flexibility.

With this in mind there’s a practical consideration about case severing that we didn’t have room to discuss last time. That’s the fact that your bankruptcy lawyer may not be able to advise either of you once you’re getting divorced.

Conflict of Interest

Lawyers are not allowed to simultaneously represent two people who have interests that are in conflict with each other. Only if your interests are quite closely aligned so that the same legal solution (such as filing a Chapter 13 case) is the best for you both can one lawyer represent both.

That’s true even if the two of you are in somewhat different circumstances. Most of the time two spouses have at least slightly different circumstances. For example, each of you may have some debts that you individually owe, and other debts you jointly owe. You may own some assets individually and the rest own jointly with your spouse.

If your circumstances are very different from your spouse’s, one lawyer may not be able to represent you both. Just being married does not automatically mean there isn’t a conflict of interest between you. This might prevent joint representation by one lawyer even if you have the best marriage in the world.

For example, one spouse may have come into the marriage with a significant asset. The other spouse may owe multiple years of income tax debt predating the marriage. His tax debt and overall situation may by far be best handled in a Chapter 13 case. She may not need any bankruptcy, or a Chapter 7 case if her asset can be protected through an exemption. Because her primary interest may be to save her asset while his may be to get his taxes paid or written off through, their interests may be in conflict. Especially if he is pressuring to do something she’s reluctant to do, she may need her own lawyer to determine what is in her own best interest.

Conflict of Interest from Coming Divorce

Let’s assume the two spouses’ interests were aligned enough so that they filed a Chapter 13 together. They got independent legal advice if that was needed, but in any event they filed the case jointly. But now, a year or two into their 3-year case they’re getting divorced. Up until now throughout their Chapter 13 case one bankruptcy lawyer has been representing them.

At this point that single lawyer likely cannot keep representing both of them. That’s because almost for certain they have become each other’s legal adversaries. Their individual interests have come into conflict in two ways.

First, as to their prior debts, they are likely in conflict there. In the example above, to the extent his income taxes have not yet been paid off or written off through the Chapter 13 payment plan, he’ll want to take care of them. He’d likely want to finish the Chapter 13 case, presumably with some amendments to account for post-divorce finances. She’ll have no interest in those taxes since she is not liable on them. Her interest will be on protecting her significant asset, maybe by dismissing her side of the Chapter 13 case.

Second, divorce almost always generates its own new liabilities, one ex-spouse liable to the other. These may include child or spousal support, debt from division of assets, and obligations to pay certain joint or separate debts. A bankruptcy lawyer absolutely cannot give either person any advice about such matters because that would advance the interest of one spouse to the direct detriment of the other spouse.

Lawyer’s Advice about Severing the Case into Two

In practical terms, most couples getting divorced while in a Chapter 13 case will need to sever their case into two cases. Then each spouse can do what is appropriate for themselves in their separate cases.

When a case is very close to completion it may be appropriate to just finish the case.  In the above example, if the payment plan is just a month or two to completion it may serve both spouses to get the discharge of debts this would provide them.

Or similarly, it may make sense to convert the Chapter 13 case into a joint Chapter 7 case. That may be in each party’s best interest. The reason they filed a Chapter 13 case—such as to save the family home—may well no longer apply. So getting the relatively quick closure provided by Chapter 7 may serve both of them best.

But whether to sever the case into two, finish off the Chapter 13 case, or convert to Chapter 7, the original Chapter 13 lawyer cannot advise the spouses about these options. That’s because he or she owes a duty of loyalty to both individuals. And the lawyer can’t be loyal to two people who now have opposing interests.

The lawyer can’t advise them about the effect of these options on an asset owned or a debt owed by one of them. That’s because they now have opposing interests about that asset or debt.

Same thing is true with advice about the effect of their bankruptcy options on their upcoming divorce. Obviously the two have directly opposing interests about all aspects of their divorce. Their lawyer can say nothing whatsoever to them about how their bankruptcy options may affect their divorce.

The Lawyer Needs to Either Withdraw or Require Independent Advice

The bottom line is that in most cases the Chapter 13 lawyer has to withdraw from representing the spouses. Or at the least the spouses have to meet with and get advice from their own separate lawyers. Those two lawyers could very well then agree that both spouses would be served by the case being severed. They would authorize the original lawyer to file a motion to sever and then withdraw from representation. The two lawyers would then each take over representation in those two severed cases.

 In some limited situations those two lawyers might agree that both of the spouses would be best served by either completing the Chapter 13 case or converting it into a Chapter 7 case. They may authorize the original lawyer to take that action. But they would continue being available to provide their individual clients with independent advice as the Chapter 7 or  Chapter 13 case was completed.

 

Protect Yourself from Your Co-Signer

August 7th, 2017 at 7:00 am

If you can’t or won’t pay a co-signed debt, or pay a co-signer, you need to protect yourself from that debt and from your co-signer. 

 

What if you owe a co-signed debt and need bankruptcy relief from all your debts?

In the last two blog posts we explained how bankruptcy helps you pay a co-signed debt and protect your co-signer. A Chapter 7 “straight bankruptcy” may free up enough cash flow so you can afford to pay the co-signed debt. Or the special “co-debtor stay” may protect your co-signer as you catch up on and pay off the co-signed debt over a longer span of time.

But what if—even with the help of bankruptcy:

  • you can’t afford to pay the co-signed debt now or at any time in the foreseeable future?
  • you no longer want to pay your co-signer because your relationship has changed?
  • your co-signer got the money or other benefit of the debt and so should pay it back?
  • you still want pay it eventually but have no idea when you’ll be able to?

In all these situations you need legal protection from your co-signer.

Your Legal Obligations to the Co-Signer

You need legal protection from your co-signer because you have a legal obligation to the person or may have one. You either have a clear obligation, or at least a significant risk of one. This actual or possible obligation means you should cover it in your bankruptcy case.

You likely have an actual legal obligation to your co-signer if the two of you were clear about its terms. You wrote it down, or maybe just talked about it but clearly agreed on the main terms.  Those basic terms would include who would pay the debt and what would happen if that person did not pay. For example, you agreed that you would pay the debt, and would pay back the co-signer if he or she had to pay any part of it.

Or sometimes when two people jointly sign on a debt they are not clear about the obligations between them. The terms of that obligation are not made clear. Then the co-signer less likely has a legally enforceable claim against the other, but may still try to assert one.

Include Your Co-Signer in Your Bankruptcy

Either way, cover yourself in your bankruptcy case. Whether or not your obligation to your co-signer is legally enforceable, you should act to discharge (permanently write off) whatever obligation to that person you may have. You do this by listing your co-signer as a potential creditor in your bankruptcy schedules.

Do this even if you think you don’t really owe the co-signer anything. You may remember the co-signer agreeing to make the payments if you couldn’t. You may remember the co-signer treating the whole arrangement as a gift. But now he or she may remember it differently. So err on the side of caution and cover whatever legal liability you may have to the co-signer.

How You’re Protected from Your Co-Signer

If you list your co-signer when you file bankruptcy, he or she can’t contact you to collect the debt. The “automatic stay” that prevents virtually all creditors from collecting on their debts applies to your co-signer. He or she can’t pressure you to pay the co-signed debt, or to pay him or her directly.  

If your co-signer violates the “automatic stay” by trying to make you pay, he or she could be punished. Similarly, once your debts have been discharged (including your obligation to your co-signer), his or her attempt to make you pay would be illegal, a violation of the injunction against attempting to collect on a discharged debt. These are both serious violations of federal law.

You CAN Still Pay

Including your co-signer as a creditor in your bankruptcy documents takes away your legal obligation. But then it’s still totally up to you whether to pay anything to the co-signer. The advantage is that if you do pay your co-signer or the co-signed debt, you do so without legal pressure. You pay whenever and as much as you can or want to.

Conclusion

Talk with your bankruptcy lawyer about how you would like to deal with your co-signer. To the extent that you have a sense of personal obligation, there are safe ways to satisfy it.

 

No Means Test If You Have More Business Debts than Consumer Debts

June 26th, 2017 at 7:00 am

You only have to pass the means test if you have “primarily consumer debts.” If you have more business debts, skip the means test.  


The Consumer “Means Test”

Our last blog post introduced the “means test.” It’s used to see if you qualifying for Chapter 7 “straight bankruptcy.” If you don’t qualify, you may instead have to file a Chapter 13 “adjustment of debts” case requiring a 3-to-5-year payment plan.

But the means test only applies to consumer bankruptcy cases. Otherwise you can skip the means test.

The official Voluntary Petition for Individuals Filing Bankruptcy form asks the following two questions:

16a. Are your debts primarily consumer debts? Consumer debts are defined in 11 U.S.C. § 101(8) as “incurred by an individual primarily for a personal, family, or household purpose.”

16b. Are your debts primarily business debts? Business debts are debts that you incurred to obtain money for a business or investment or through the operation of the business or investment.

If you answer “no” to the first question (and usually “yes” to the second question), than you skip the means test. This can be a significant advantage because you may otherwise not qualify under Chapter 7.

How this Exception Fit’s into the Purpose of the Means Test

The purpose of the “means test” is to only allow you to go through a Chapter 7 case if you don’t have the “means” to pay a meaningful amount of your debts to your creditors. If your income is no more than the “median income” for your family size in your state, the law assumes you don’t have the “means” to do so. Next, if your income is more than the median amount, then your allowed expenses are carefully reviewed to see if you do have enough “means” left after your expenses.

When Congress created the means test, it decided to apply the test only to individual consumers, not to businesses and business owners.

The mechanism that Congress used to divide between consumers and business is the phrase: “primarily consumer debts.” All those with “primarily consumer debts” have to take the “means test” to qualify for Chapter 7 relief. Those without “primarily consumer debts” do not have to take the “means test.”

Not “Primarily Consumer Debts”

If the total amount of all your consumer debts is less than the total amount of all your non-consumer (business) debts, your debts are not “primarily consumer debts.” If so, you can avoid the “means test.”

Section 101(8) of the Bankruptcy Code defines a “consumer debt” at as one “incurred by an individual primarily for a personal, family, or household purpose.”

As you add up your consumer and non-consumer debts, realize that you may have more business debt than you think for two reasons.

First, debts that you would normally consider consumer debts might not be. For example, debts used to finance your business, even if otherwise straightforward consumer credit—credit cards, home equity lines of credit, and such—may qualify as non-consumer debt based on your business purpose of that credit. (Note the explanation to the question in the bankruptcy petition quoted above, that business debts include both those incurred in funding the business and in operating it.)

Second, some of your business debts may be larger than you think. For example, If you surrendered a leased business premises or business equipment you would likely be liable not just for the missed lease payments owed at the filing of the bankruptcy but also potentially for the string of future contractual payments, depreciation, and other possible charges.

Through a combination of these two considerations, your total business debt may be much more than you expected. So you might have more business debt than consumer debt.

Conclusion

You may not be in a position—given your income and the expenses you’re allowed—to pass the means test. If you have ANY business debts, be sure to ask your bankruptcy lawyer to see if you qualify for this not-“primarily consumer debt” exception.

 

When a Creditor Does Not Have an Enforceable Lien

August 19th, 2016 at 7:00 am

For a debt to be secured, the creditor has to go through the right legal steps. Otherwise you don’t have to pay the debt.

 

Expressing Your Intentions with Your Secured Debts

When you file a Chapter 7 “straight bankruptcy” case you list all your debts on the bankruptcy court documents. You separately list secured and unsecured ones. A secured debts is one in which the creditor has a lien on an asset you own. For example, a vehicle loan is a secured debt in which the lender is a lienholder on your vehicle’s title.

As to each of your secured debts, you inform the creditor whether you intend to keep the asset or not. If you intend to keep it, you also state what you intend to do with the debt. For example, with a vehicle loan, if you state that you intend to keep the vehicle you would likely also state that you intend to “reaffirm” the debt—that is, pay the debt under its usual terms in order to be able to keep the vehicle.

These disclosures are done through the “Chapter 7 Individual Debtor’s Statement of Intention” form. Your lawyer will help you complete it; after you sign it copies are mailed to your creditors and it’s filed at the bankruptcy court.

What It Takes for a Debt to Be Legally Secured

Creditors must take certain legal steps to create a legally enforceable lien in something you purchase or in something you already owed. Those legal steps are determined by state laws, which tend to be similar from state to state. But they can differ a lot in the details.

Those legal steps vary a lot among different kinds of collateral. Let’s go back to our example of a lender’s lien on a vehicle. The paperwork and procedure to create a lien on a vehicle title is completely different from the paperwork and procedure that your home mortgage lender used to create a lien on your home. And those are completely different from how a furniture store creates a lien on what you buy there.

If a Creditor Doesn’t Go Through the Legal Steps

It’s usually the creditor’s job to do what is necessary to create a lien on what you are buying or on what you are providing as collateral. After all, the creditor is the one who wants the extra leverage against you. You’ll more likely pay a debt it it’s backed up by a lien on something you need or want. And if you don’t pay, the creditor will at least be able to repossess or foreclose on the collateral to get back some of the money it lent.

For countless reasons creditors don’t always go through the legally necessary steps. If not, what happens to that debt in a Chapter 7 case?  

Debts Unexpectedly Not Secured

As mentioned above, there are different procedures for creating liens for different kinds of collateral. Those procedures differ in sometimes crucial details from state to state, and those state laws change over time. Notwithstanding these challenges, you’d think creditors would keep on top of this given how important it would be for them. But they don’t always know the laws as well as you’d think. Or even if their official procedures are appropriate, their employees don’t always follow those procedures perfectly. Creditors can mess up.

As a result when you file a bankruptcy case it’s smart to find out whether debts that you think are secured really are. The difference can be huge. Simply put, it can make the difference between having to pay a debt in full vs. paying nothing at all.

We’ll illustrate this with an example.

The Example

Assume that you bought your stove, refrigerator, clothes washer and drier at a local appliance store 18 months ago.  You and your family had moved into a rental home which didn’t have these appliances. You bought them all on credit for $3,000, financed on a contract through the store. You thought you remember hearing or reading somewhere that the store had a right to repossess what you bought if you didn’t pay off the contract. That would’ve meant that the store had a legally enforceable lien on the appliances to secure the debt you owed.

You didn’t have to make payments on the contract for the first 3 months (“90 days same as cash”). Then a high interest rate kicked in, and you made most of the relatively small payments. But then you didn’t pay the last couple payments, and now still owe $2,600.

You and your spouse have now filed a Chapter 7 bankruptcy case to get a fresh financial start.

Your family really needs these appliances. You have no spare cash with which to replace them, and no credit with which to do so. So you figure you’ll have to keep paying on the high interest contract until it’s paid off. With the low payments and high interest you’d probably end up paying close to $4,000 more on appliances that currently likely have a fair market value of no more than a combined $1,500. But you figure you really don’t have a choice.

The Store Contract Didn’t Actually Create a Secured Debt

However, your bankruptcy lawyer looks through the purchase contract and finds out that the store did not create a lien in the appliances. To create a lien, the contract needed to clearly state that it was doing so. But it did not. As a result, the debt is not legally secured by those appliances or by anything else you own. It’s an unsecured debt, one that can almost certainly be discharged—legally written off—without paying for the appliances.

So, instead of having to pay anything more on the appliances, much less the $4,000 or so that you thought you would, you pay nothing. And the appliances are yours to keep free and clear.

 

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