Blog
Law Offices of Chance M. McGhee

Call Today for a FREE Consultation

210-342-3400

Archive for the ‘creditors’ tag

Prevent Future Judgment Liens

August 26th, 2019 at 7:00 am

Bankruptcy can prevent future judgment liens. It usually stops a lawsuit from turning into a judgment, and then a judgment lien on your home. 


Judgment Liens Are Dangerous

Our last blog post was about how filing bankruptcy can sometimes remove, or “avoid,” a judgment lien from your home. This is a great potential benefit of bankruptcy if a judgment lien has already been recorded.

But it is often much better to file a bankruptcy case before a judgment lien hits your home’s title. Here are a few of the practical reasons why:

  • You have to meet certain strict conditions to be able to avoid the judgment lien. If you don’t meet them, even bankruptcy won’t get rid of that lien on your home. You may have to pay all or part of the debt in spite of filing bankruptcy.
  • Even if you succeed in avoiding the lien in your bankruptcy case, it is an extra step that can cost you more. And the cost can go up substantially if the creditor fights your lawyer’s efforts to avoid the lien. Besides higher lawyer fees, you may have to pay for a home appraisal and for the court testimony of the appraiser.
  • The existence of a judgment lien adds uncertainty, and thus some extra anxiety, to your bankruptcy process. The goal of bankruptcy is relief. So it’s better to prevent a judgment lien from hitting your home than messing with it after it has hit.

Judgment Liens Are Preventable

Filing bankruptcy usually stops an ongoing lawsuit against you from turning into a judgment. Bankruptcy’s “automatic stay” immediately stops “the… continuation… of a judicial, administrative, or other action or proceeding against the debtor…  .” Section 362(a)(1) of the U.S. Bankruptcy Code.

Filing bankruptcy also usually prevents future lawsuits against you from being filed much less turning into judgments. The automatic stay” immediately stops “the commencement… of a judicial, administrative, or other action or proceeding against the debtor…  .” Section 362(a)(1) of the U.S. Bankruptcy Code.

The exceptions are debts that cannot be written off (“discharged”) in bankruptcy, such as certain ones based on fraud, income taxes, child or spousal support, or criminal behavior. But bankruptcy does discharge most debts. So filing bankruptcy will stop ongoing and future lawsuits on all those debts. And it will prevent those debts from turning into dangerous judgment liens on your home.

The Timing Can Be Crucial

Filing bankruptcy triggers the protections of the automatic stay. It’s too late once a judgment lien has already been recorded. (Except if that lien qualifies for getting “avoided.”)

It’s safest to file your bankruptcy case before you’ve been sued by a creditor. Once you’ve been sued, state laws differ about how quickly that lawsuit will turn into a judgment, and then a judgment lien. State laws also differ about what you and your lawyer can do to slow down that process. Intervening to slow it down may make sense so that you can file the bankruptcy case before a judgment lien can get recorded.

 

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.

 

An Example of a “Preference”

December 10th, 2018 at 8:00 am

A “preference” makes more sense when you see an example. Here’s one. This also helps explain how to avoid creating one. 

 

Last week we explained why paying a creditor before filing bankruptcy could cause problems during bankruptcy. That’s especially true if the creditor you pay is one that you have personal reasons to favor. We explained the circumstances in which such a payment might possibly be considered a “preference,” or a “preferential payment.”  If so, your favored creditor could well be required to return the money you paid, except not to you but rather to your bankruptcy trustee, for distribution to your creditors in general.

We ended last week saying we’d next give you an example of a preferential payment made during the holidays, and practical ways to avoid it.

Our Holiday Example

Imagine that you owe your sister $3,000 for loaning you this money in 2016 to pay your mortgage (or rent). Nothing was put in writing, and you didn’t have to pay interest. But you and your sister agreed that you had to pay it back. Now she’s unexpectedly getting a divorce and she really needs the money. You’re planning on filing bankruptcy early in 2019. You’ve stopped paying most of your other creditors and are making extra money from a part-time job during the holidays. So you now have the $3,000 to pay her back.  

Here’s what would likely happen if you paid her now and then filed a bankruptcy case within a year of doing so.

A month or two after filing bankruptcy the bankruptcy trustee would very likely demand that your sister pay $3,000 to the trustee.

The $3,000 would likely be considered a preferential payment because it was:

  • made within 365 days before the bankruptcy filing
  • to an “insider,” which includes a “relative” (or within 90 days NOT to an “insider”)
  • while you were “insolvent”—essentially had more debts than assets
  • resulting in the sister getting more than she would in a Chapter 7 distribution of your assets  (usually just meaning more than getting nothing)

Assuming the payment meets these requirements of a preference, if your sister didn’t pay the bankruptcy trustee the demanded $3,000 the trustee would likely sue her to make her pay. Once the trustee got that $3,000, it would be divided among your creditors according to a set of “priority” rules. Your sister may receive nothing from this distribution, or likely only a small portion of the $3,000 you owed. Your effort at helping her would likely have seriously backfired.

Avoiding this Unhappy Result

You can avoid this preferential payment problem simply by not paying your sister anything during the year before filing bankruptcy. (This includes either money or anything else of value.)

Instead talk with your bankruptcy lawyer about how to best protect the $3,000 that you’ve scraped together. And then pay your sister after your bankruptcy case is filed. If you’re filing a Chapter 7 “straight bankruptcy” case, that may mean a delay of only a few weeks.  

If you’ve already made the payment to your sister discuss this as soon as possible with your lawyer. If may or may not be possible to undo this payment. If so, that may solve the problem. If not, it may make sense to wait for a year to pass from time of the payment to your filing.  (Or you may need to wait only 90 days if the person you paid does not qualify as an “insider.”)  Either way, in some circumstances it may not make sense to wait. Your lawyer will help you weigh your options.

Finally, what may seem like a preferential payment may in fact not be one. For example, if instead of paying your sister you paid your ex-spouse to catch up on a child support obligation, there’s a good change that would not be a preferential payment.

So again, talk with your lawyer right away if you think you may have made a preferential payment. Or preferably do so before you pay a creditor, in order to prevent doing what may not be in your best interest.

 

The Automatic Stay in Chapter 7 and 13

November 22nd, 2017 at 8:00 am

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


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

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

The Immediate Protection

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

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

How Long the Protection Lasts

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

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

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

Chapter 7 Is Not Designed for Ongoing Protection

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

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

Chapter 13 IS for Ongoing Protection

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

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

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

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

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

Conclusion

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

 

Keep an Open Mind about Chapter 7 or 13

November 17th, 2017 at 8:00 am

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

 

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

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

An Example Using Chapter 7

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

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

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

An Example Using Chapter 13

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

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

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

Conclusion

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

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

 

Treatment of Different Types of Creditors in Chapter 13

July 26th, 2017 at 7:00 am

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


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

Secured Debts

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

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

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

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

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

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

Priority Debts

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

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

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

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

General Unsecured Debts

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

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

Limited Flexibility 

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

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

 

Using “Preference” Law to Your Advantage

April 19th, 2017 at 7:00 am

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

 

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

The Big Picture

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

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

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

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

Payment(s) Qualifying as a “Preference”

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

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

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

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

The Elements of a Preference

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

These two elements are often quite easy to meet.

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

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

For Example

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

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

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

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

The $600 Safe Haven for Creditors

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

The Preference Doing You Some Good

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

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

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

The “Preference” Problem

April 14th, 2017 at 7:00 am

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

 

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

Preference Law

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

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

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

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

A “Bad” Preference

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

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

Stumbling into a Preference

Here’s how it usually happens.

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

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

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

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

Once You File Bankruptcy

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

Here’s what sometimes happens in real life.

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

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

Messing Up Your Intentions and Expectations

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

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

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

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

Clearly not a good result!

 Avoid the Risk of a “Preference”

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

 

Going to Trial on a Nondischargeability Dispute with a Creditor

March 24th, 2017 at 7:00 am

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


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

Discharge Challenges Are Rare, Going to Trial is REALLY Rare

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

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

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

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

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

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

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

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

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

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

Settlement by Mediation or Arbitration

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

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

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

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

Going to Trial

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

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

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

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

 

Call today for a FREE Consultation

210-342-3400

Facebook Blog
Back to Top Back to Top