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Archive for the ‘discharge debts’ tag

Chapter 7 Timing to Discharge Student Loans

October 26th, 2020 at 7:00 am

Discharging a student loan requires showing undue hardship. The timing of your Chapter 7 filing can determine whether you succeed in this.   

 

We’re in a series on the smart timing of your bankruptcy case. Last week we introduced the special condition you must meet to discharge (write off) student loans: “undue hardship.”

Bankruptcy discharges other special forms of debt—such as income taxes—after the passage of a certain amount of time. But student loans are different in that there is no explicit time period laid out in bankruptcy law. Rather “undue hardship,” the condition you must meet to discharge a student loan, often has timing considerations within it. That is, qualifying for “undue hardship” may require timing your bankruptcy case right.  You may not be in “undue hardship” at one point but could be earlier or later.

Today we show that can play out under Chapter 7 “straight bankruptcy.”(Next week we’ll do the same under Chapter 13 “adjustment of debts.”)

Undue Hardship Requirements

The U.S. Bankruptcy Code says you can discharge a student loan if it “would impose an undue hardship on the debtor [you] and the debtor’s dependents.” Section 523(a)(8). Generally bankruptcy courts have interpreted “undue hardship” to require meeting the following three conditions. Each has a timing consideration. We’ll look at each of these three, showing how they can affect the timing of your Chapter 7 case.

1. Presently Inability to Pay

You first need to show that if you had to repay the student loan under your current income and expenses, you would be unable to maintain even a minimal standard of living.

This focuses on the present. It asks whether, as of the time you are asking for the “undue hardship” discharge, you meet this condition.

The timing issue here should be obvious. You might be able to meet a minimal standard of living while paying your student loans at one point. But then you can’t after your life circumstances change. Or maybe it’s the other way around. You can’t meet that condition now but you may be able to do so in a few months after your circumstances improve.

For example, a person may have a chronically worsening medical condition. For the moment he or she may be able to work and pay the student loan. (This may be after discharging all of his or her other debts through a Chapter 7 case.) But the person may be able to realistically anticipate being unable to work in the future.

Here it likely makes sense to wait to file a Chapter 7 case until her or she can no longer work. That’s especially true if that transition is happening reasonably soon.

2. Extended Inability to Pay

Then you need to show that you expect that your present inability to pay is going to last for an extended period.

This second condition focuses on the future. It asks whether any present “undue hardship” is expected to last through a significant part of the loan repayment period.

This is a more challenging condition because it involves predicting the future and convincing a bankruptcy judge about it.

Here’s an example. Imagine if someone was in an extremely serious vehicle accident a couple of months ago. He or she is presently medically incapacitated and unable to work. Assume that for now the person absolutely can’t afford to pay anything towards his or her student loan(s). But it’ll take a while until the doctors can reliably predict the person’s long-term health prospects. Also, if another driver allegedly caused the accident there may be litigation to determine fault and the amount of damages. So currently this person’s future financial prospects are very unsettled. It’s an open question how long he or she will continue to be unable to pay the student loan(s). In particular it’s unknown whether this inability will persist for much of the remaining term of the student loan(s).

Here it could make sense to wait to file a Chapter 7 case until knowing better whether the physical disability and financial incapacity are expected to continue for that length of time.

3. Prior Effort to Pay or Make Arrangements

And third, you need to show that you previously made a meaningful effort to repay the loan. Some other available arrangements may also qualify.

This last condition focuses on the past. It asks whether you’ve reasonably addressed your student loan debt(s), by making payments when you could and/or trying to get some kind of administrative relief before asking for the “undue hardship” discharge.

Here we’re looking backwards instead of forward. You can’t change the past. But you may be able to take appropriate steps now so that in the future the past will be different. Then you could more likely meet this condition when filing a Chapter 7 case in the future.

 For example, consider a person who has recently started being obligated to pay a student loan and can’t do so. He or she likely needs to first try to defer and/or reduce payments before qualifying for “undue hardship.” Or, consider another person who’s been in repayment mode but has not looked into the administrative possibilities lately. It will likely be necessary to do so to show this effort and then file a Chapter 7 case afterwards.

Timing Choices Can Be Tough

Almost always the timing of a bankruptcy case involves the weighing of different pressures. Does it make sense to delay filing to improve your likelihood of qualifying for “undue hardship”? Or are there other immediate and looming creditor problems that press for an earlier bankruptcy filing?

This is one of the most important benefits of having a bankruptcy lawyer. He or she will enable you to understand the timing options, and the advantages and disadvantages of each. The options will likely be impossible to weigh realistically otherwise.

 

Bankruptcy Timing to Discharge Student Loans

October 19th, 2020 at 7:00 am

  

Discharging—permanently writing off—student loans can be difficult. You may be able to make it easier to do with good bankruptcy timing.   

Discharging Student Loans in Bankruptcy

It takes certain circumstances to discharge student loans. Those circumstances can involve the right timing of your bankruptcy case.

Bankruptcy discharges most debts. But it “does not discharge” you from a student loan unless not discharging that debt “would impose an undue hardship.” “[I]mpose an undue hardship” on whom? “[O]n the debtor [you] and the debtor’s dependents.” Section 523(a)(8) of the U.S. Bankruptcy Code.

What does that mean and how is it affected by the timing of your bankruptcy case?

“Impose an Undue Hardship”?

What does it take for you and your dependents to suffer an “undue hardship”? The Bankruptcy Code defines many terms (See Section 101, Definitions), but not this one.

Often when Congress deliberates and passes a statute there is discussion about the meaning of a term within the statute. That’s its “legislative history.” But there is no such helpful written explanation here. “The legislative history…  also fails to precisely specify how courts should determine whether a debtor qualifies for a discharge based on an undue hardship.” Ashley M. Bykerk, Student Loan Discharge: Reevaluating Undue Hardship… , 35 Emory Bankr. Developments J., 509, 512-513 (2019).

So the bankruptcy courts have been left to figure out, case by case, what qualifies as “undue hardship.”

The courts start with those two words. Congress added “undue” apparently to create a standard that is beyond or more than a simple hardship. “Undue” means “exceeding what is appropriate or normal; excessive.” So Congress seemed to say that to discharge a student loan it’s not enough if it’s causing you a hardship. It must be causing you a more-than-normal, excessive hardship.

But how is such a level of hardship determined in practice?

The 3-Part Test

As bankruptcy courts throughout the country have interpretted “undue hardship,” over time they’ve settled on a 3-part test. There are some differences among the courts but generally you need to meet the following three conditions:

1. If you had to repay the student loan under your current income and expenses, you would be unable to maintain even a minimal standard of living.

2. This inability is expected to last for a significant part of the loan repayment period.

3. You previously made a meaningful effort to repay the loan, or to qualify for appropriate forbearances, consolidations, and payment-reduction programs.

The Timing Considerations of the 3-Part Test

When you look at these three conditions you can see that each has a timing component:

1. The first condition focuses on the present. It asks whether, under your income and expenses as of the time you are asking for the “undue hardship” discharge, you’d be unable to maintain even a minimal standard of living if you had to repay the student loan.

2. The second condition focuses on the future. It asks whether any present “undue hardship” is expected to last through a significant part of the loan repayment period.

3. The third condition focuses on the past. It asks whether you had made a meaningful effort to repay the loan or to qualify for appropriate administrative relief before asking for the “undue hardship” discharge.

Whether or not you qualify under these conditions can shift over time. For example, you may be expecting worsening health which will reduce your income and increase expenses. So you may be currently able to maintain a minimal standard of living but won’t when your health worsens.  So you may not meet the first condition today but expect to later. Thus, whether you qualify for an “undue hardship” discharge can turn on when you file your bankruptcy case.

Next

The next two blog posts will show how you and your bankruptcy lawyer can use these principles to your benefit. We’ll look at pertinent timing issues when filing a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.” Feel free to call us, your bankruptcy lawyers, in the meantime.

 

Timing Bankruptcy to Cover New Debts

July 20th, 2020 at 7:00 am

A bankruptcy covers the debts you owe as of the moment you file your case, not future debts. So how do you know when to file your case?

 

In last week’s blog post we introduced how to time your bankruptcy filing. We gave a list of 15 examples of timing considerations. Today we start with the first example: timing your bankruptcy filing so that it covers as many debts as possible.

Debts You Might Owe Very Soon

Here are two situations in which you expect to soon owe a debt that you don’t owe at the moment.

First, let’s say you have a medical condition for which you are about to see a doctor or other health professional. Or it’s an ongoing condition for which you get treatment regularly. Let’s assume that you know that you can’t afford to pay the upcoming medical bills for these upcoming services. You are already feeling overwhelmed by your present debts. You’re feeling pressure to file bankruptcy now to get relief from those debts. But you’re wondering if you should wait to file bankruptcy until after you’ve finished incurring the upcoming medical debts.

Or second, let’s say you’ve been relying on credit cards, cash advances and such to get by. You’re falling further and further behind, and you know the situation is not sustainable. You recognize that you’ll never be able to pay all your debts, so you need bankruptcy relief. But you don’t know when you should stop using the credit and file bankruptcy.

Here’s some guidance.

Bankruptcy Only Includes Existing Debts

Debts that you legally owe at the moment you file your bankruptcy are included in your bankruptcy case. Debts you don’t owe until after you file your bankruptcy are not included. That include debts you incur the next day. Or actually, even debts you incur an hour after your filing.

For example, usually 3 or 4 months after filing a Chapter 7 “straight bankruptcy” case you receive a discharge. That legally writes off most debts, including virtually all medical debts and unsecured credit card debts. But that only covers those medical and credit card (and other) debts legally owed at time of filing.

And in a Chapter 13 “adjustment of debts,” only the debt in existence at the time of filing are covered in the court-approved payment plan.

What Determines whether a Debt is Included

Under bankruptcy law, a debt is defined as a “liability on a claim.” Section 101(12) of the U.S. Bankruptcy Code. In other words, a debt is what you owe on a “claim.” And a “claim” is a “right to payment” that a creditor has against you. Section 101(5) of the Bankruptcy Code. Therefore, the issue is whether you and/or the creditor have acted to trigger a right of payment from you. If so, and that occurred before you file the bankruptcy case, the debt is included.

So, a medical provider has a right to payment from you immediately upon providing you the medical services. A credit card creditor has a right of payment from you immediately you’re your use of the card for a purchase or cash advance. Similar triggers create a debt with other types of debts.

What’s Not Required

Notice in the two above examples we said the right to payment exists “immediately upon” the triggering event.  So the debt exists then as well. This does not require the creditor to send a bill, or for you to receive it.

Notice this also means that neither you nor the creditor needs to know the amount of the debt. For bankruptcy purposes it’s already a debt that can be included in your bankruptcy case. The amount can be worked out later.

The debt can also be “contingent.” You may not actually have to pay the debt yourself; that may depend on a separate event. For example, someone else may also be liable on a joint debt, or it may be covered by insurance. But it’s still a debt for bankruptcy purposes.

Also, you may not agree that you owe the debt. It can be “disputed.” It’s still a debt for bankruptcy purposes and thus included in your bankruptcy case. The creditor and you may resolve the dispute later, if necessary.

(See Section 101(5)(a) of the Bankruptcy Code.)

Trigger Event Not Always Obvious

With a medical or credit card debt it’s quite straightforward when the debt has been created. And that’s true of the majority of debts; it’s usually pretty obvious. For example, you become liable on a vehicle loan debt when you sign or otherwise legally enter into the loan agreement. Same when you buy furniture on a contract, or incur a payday loan.

But how about an annual federal or state income tax debt? What triggers that into a debt? 

There’s a relatively simple answer on this: legalistically you owe the tax as of the end of that tax year. So as of January 1 of the following year you can include that tax in your bankruptcy case. (The effect of including it is a different question. The tax must meet certain conditions to discharge it under Chapter 7, for example. But if it doesn’t meet those conditions, you can pay it under the favorable conditions of Chapter 13.)

Tougher Situations

How about more complicated debts? How about a debt arising out of a divorce, such as an obligation to pay one of the marital debts? Or to pay child support? Do you have to wait (and not file your bankruptcy case) until the divorce is final? Or don’t some of those debts arise from the marriage itself so you can file bankruptcy earlier?

Or how about an apartment lease that you signed a while ago but want to get out of now? Is the triggering event when you signed the lease? Or is a new debt created every month you stay in the apartment? If it’s the latter then does that mean that you may still owe for the time you stay there past your bankruptcy filing date?

Similarly, on a condo foreclosure, would you continue owing homeowner association dues for the months after your bankruptcy filing? Does it matter that you’ve moved out if the condo is still in your name until the foreclosure is final?

In these and many other less straightforward situations the answers are not nearly so obvious. And the answers may be surprising and financially dangerous.

Such as in the last example. Generally you DO keep incurring each new month of homeowner dues. And you do so as long as the lender has not completed the foreclosure process. That could take many months, or in some circumstances even years. Those accruing dues would not usually be covered by a bankruptcy case you filed before those months/years of dues accrued.

So deciding when to file your case can get complicated fast.

The Best Advice is to Get Some Good Advice

Even in relatively clear situations—the above medical, credit card, and income tax ones—there are delicate bankruptcy timing issues.

If you’re anticipating many months (or even years) of medical procedures, should you wait until they’re done? What if you’re being sued/foreclosed/repossessed and don’t feel you can wait?

When does it make sense to wait to the end of a calendar year to include that tax debt in your Chapter 13 case? Are there other alternatives such as a partial-year tax filing?

The timing issues get even more complicated in the other less-straightforward examples we gave, and in countless others.

The honest truth is that the timing solution will always depend on your unique situation. It’s actually true: you are unique, your combination of circumstances is unique, and your timing solution must be unique.

It’s the job of your bankruptcy lawyer to understand you and your situation. He or she is trained and experienced about your legal options, timing and otherwise. He or she has spent a career wrestling through tough situations like yours. You’ll learn about your timing options, the advantages and disadvantages of each, and likely get a recommendation about what’s best.

 

More Actions to Take When Considering Bankruptcy

June 22nd, 2020 at 7:00 am

If you’re considering filing bankruptcy, what debts can you incur and which should you avoid? What are the possible consequences?


Two weeks ago we listed 5 crucial things you’d benefit from learning about if you’re thinking about bankruptcy:

  1. if bankruptcy is indeed the best option for you
  2. how Chapter 7, 11, 12, and 13 work, and whether one is right for you
  3. what actions you should take to position yourself for either a possible or definite filing
  4. what you should avoid doing
  5. the best timing for your bankruptcy filing

We covered the first 2 of these back then. Then last week we got into # 3 and #4, actions you should take and those to avoid before bankruptcy. We focused on keeping, and not selling or giving up your:

  1. assets
  2. especially any retirement funds
  3. collateral on debts, such as your home, vehicles, or furniture

But there are many other actions that could be smart to take or to avoid as you’re contemplating bankruptcy. Consider the following questions. Should you:

  1. take on more debt to buy time and maybe avoid filing bankruptcy?
  2. file unfiled income tax returns and/or prioritize paying unpaid income taxes?
  3. catch up on late child or spousal support payments?
  4. file for divorce before or after filing bankruptcy?

We’ll cover the first of these today, the rest in upcoming blog posts.

Taking on More Debt

Taking on more debt can take many forms. Whether doing so is smart depends on which form it takes. It also depends on each person’s own circumstances.

Here are some of the most common forms:

  1. increasing unsecured debt from present creditor(s), such as adding to present credit card(s)
  2. getting new unsecured debt, such as accepting a new credit card offer
  3. getting new secured debt, such as buying a vehicle or furniture on credit
  4. increasing or getting new “priority debt,” essentially income taxes or child/spousal support

Let’s look at the first two of these today, involving increased or new unsecured debt.

Increasing Present Unsecured Debt

If the goal is to improve your financial situation, digging a deep financial hole deeper seldom works. It’s seldom a successful recipe for avoiding bankruptcy. But there may be exceptions.

Most of the time the decision to go deeper in debt is an act of near desperation. It’s generally not a well-thought out decision. You don’t have enough in your checking account to get something you need (or believe you need). So you put it on the credit card. You know it puts you further behind but you feel you don’t have much choice.

Or sometimes you do have a plan, or at least an attempt at one. You sit down (by yourself or with your spouse or a significant other). You look at your bills and the rest of your financial life and try to figure out what you should do about your increasing debt. You may tell yourself, for example, that you’ll keep on adding to your credit cards for no more than 2-3 more months. Until you get back to work, or into a better paying job, or until you pay off another debt and free up some cash flow. And if those things won’t happen then you’ll think about getting bankruptcy advice.

But whether you’re adding to your debt impulsively or following a plan, it’s really hard to know if you’re doing the right thing for yourself. It’s almost impossible to be objective because these are really personal, emotion-driving circumstances. There’s almost always a lot of fear and hope involved. Your self-esteem is on the line. And it gets crazy complicated if there’s a spouse or other loved one deeply involved. These are not good environments for making good decisions.

Getting New Unsecured Debt

The situation is similar if you have the opportunity to get a new source of unsecured debt. You wonder if it makes sense to transfer some of your current debt to the new source of credit. It may have a lower interest rate, or better payment terms, at least for the short term. Consolidating all or part of your unsecured debt seems to make sense. It looks sensible for the short term, and you hope it will help you make long term progress on your debts.

Or again, maybe you just can’t meet your expenses this month and feel you have no choice. So the new source of credit enables you to get by for another month or two.

Risk of Challenges to Discharge of a Debt

But incurring new debt can be risky ahead of filing bankruptcy. This is true if it’s additional debt on an existing account. The creditor could challenge the “discharge” (legal write off) of recently incurred debt in your bankruptcy case. The recent debt could be considered fraudulent. The argument would be that you incurred it without intending to pay it or any sensible ability to do so. (See Section 523(a)(2) of the U.S. Bankruptcy Code.)

That could be especially problematic if you are consolidating a lot of your debt with a new creditor or on a new account. Such actions could convert debt(s) that you could have legally discharged into one(s) you cannot.

Again, the larger the amount of the debt you recently accrue the greater this risk. The more that is at issue the more likely the creditor would raise the challenge. And of course the more the amount of the money the more you may still owe in spite of filing bankruptcy.

Rare Challenge to the Discharge of Any Debts

In certain (admittedly rare) circumstances taking certain actions before or during a bankruptcy could be even more dangerous. Lying on bankruptcy documents, hiding assets and such, could threaten your ability to discharge ANY of your debts. (See Section 727(a) of the Bankruptcy Code.)

 Incurring a significant amount of new debt soon before filing bankruptcy might also run you afoul of this provision.

The Best Pre-Bankruptcy Advice

It’s near impossible to know whether in your unique circumstances it make sense to incur a certain debt or not. As we said above, it’s hard not to act mostly out of hopes and fears—to be driven by such emotions. Even if you have the discipline to stop and try to figure things out, it’s still difficult to be objective.

Then if you do get your head and heart in the right place, you still don’t have information you need. Under what circumstances would incurring a new debt result in the creditor’s dischargeability challenge of that debt? What debt amounts and their timing would likely be okay and what would not? What debt actions by you would be acceptable and what would not?

The answers to these questions turn on your individual circumstances. The only source of the right answers to your truly unique questions is your bankruptcy lawyer.

Under the counsel of a lawyer, you’ll cut through the emotions to an objective analysis of your situation. You’ll get the information you need—the law as it applies to you—leading to answers to your questions. You’ll know better what debts you can incur and those you shouldn’t.

 

Bankruptcy Helps You Afford Your Mortgage

July 22nd, 2019 at 7:00 am

Bankruptcy frees up cash flow for your mortgage payments. Chapter 7 does so by writing off other debts. Chapter 13 does so more creatively. 


 

Both Chapter 7 and Chapter 13 Improve Your Cash Flow

A Chapter 7 “straight bankruptcy” case would very likely quickly write off (“discharge”) many of your debts. For many people it discharges most of their debts, maybe even all of them except their home mortgage. That frees up cash flow so that you can better afford to pay your mortgage.

A Chapter 13 “adjustment of debts” case is different but has a similar result. It would very likely reduce payments on most or all of your non-mortgage debts. The amount you pay monthly on your debts is often radically reduced. Plus Chapter 13 deals much better with a variety of dangerous debts. The end result is also to free up cash flow so that you can better afford to pay your mortgage.

Let’s take a closer look at these two options.

Chapter 7 Helps You Pay Your Mortgage

Are you current or almost current on your home mortgage, but only because you are not making required payments on some of your other debts? And/or are you not spending what you reasonably should be on expenses such as food, clothing, or doctor/dental visits?

Chapter 7 legally allows you to immediately stop paying most of your debts. This is accomplished through the “automatic stay,” which stops virtually all collection activity against you. (Section 362 of the U.S. Bankruptcy Code.)

Then, under Chapter 7 the bankruptcy court discharges these debts 3 to 4 months after you file your case. (Section 727 of the Bankruptcy Code.)

So if you’ve been struggling to pay your mortgage, Chapter 7 gives you huge relief. You immediately don’t have to pay some or all of other debts that you’ve been paying. So you can better afford to pay your home mortgage.

If you’ve not been paying creditors you should have been, Chapter 7 stops them from coming after you later.  This prevents them from suing you and garnishing your wages, taking away your ability to pay your mortgage later. So you get long-term relief.

Also, you can better afford to pay essential home obligations, like your property taxes and homeowner’s insurance. If you are behind on either of these, Chapter 7 helps with this immediately and long-term.

Chapter 13 Helps You Pay Your Mortgage, Helping Both Less and More

A Chapter 13 case may help your cash flow differently than Chapter 7. Usually you do continue paying something to all your creditors (although not always). However, if you have certain special debts, Chapter 13 helps your cash flow much more than Chapter 7.

Chapter 13 also helps more than Chapter 7 if you are behind on or struggling to pay your mortgage, your homeowner’s insurance, or the property taxes.

Let’s look separately at these two ways Chapter 13 help more than Chapter 7.

Chapter 13 Helps Your Cash Flow More if You Have Certain Kinds of Debts

Chapter 7 does not discharge all debts. Back child and spousal support, other divorce-related debts, recent income taxes, and student loans usually are not discharged. If you owe any of those, you will have to continue paying them. In the case of child/spousal support, the filing a Chapter 7 case does not stop its collection at all. (Section 362(b)(2) of the Bankruptcy Code.) With the other debts, collection against you can resume 3-4  months later when the case is completed. (Section 362(c)(2).)

In contrast, filing a Chapter 13 case does stop the collection of these “nondischargeable” debts. As with Chapter 7, the “automatic stay” protection against collection ends when the Chapter 13 case is finished. But with a successful Chapter 13 case that usually doesn’t happen for 3 to 5 years.

More importantly, Chapter 13 provides a great way for you to pay these special kinds of debts in the meantime. You do so based on a reasonable budget, while being protected from all of your creditors. So when your Chapter 13 payment plan is finished, you have paid off or brought current your nondischargeable debts. You no longer need the “automatic stay” protection.

By forcing these special creditors to accept payments based on your budget, you protect your ability to pay your mortgage. 

Chapter 13 Helps You Catch up on Your Home Mortgage, Insurance, and Taxes

If you are behind on your mortgage payments, Chapter 13 provides one of the best ways possible to catch up. You have 3 to 5 years to catch up. You do have to continue/resume making your ongoing monthly mortgage payments. The arrearage catch-up payments are incorporated into your single monthly Chapter 13 plan payment. As mentioned above, that plan payment amount is based on your reasonable budget. Other more urgent obligations (such as catching up on child support or maybe a vehicle payment) can sometimes go ahead of catching up on your mortgage for a while. So Chapter 13 can be quite flexible.

If you are behind on homeowner’s insurance, that’s a serious problem. That alone is grounds for foreclosure of your mortgage. The lender will very likely impose its own very expensive “force-placed” insurance, wasting a lot of your money. This often aggravates your already difficult situation. Chapter 13 eases your cash flow so that you can afford to pay your insurance. To the extent force-placed insurance is already in the arrearage amount you owe, Chapter 13 provides a reasonable way to pay it.

If you’re behind on your home’s property taxes, that also is a separate ground for foreclosure. Whether the taxes are part of your mortgage payment or you pay it separately, Chapter 13 can solve this problem. As with homeowner’s insurance, if your lender already paid the taxes, you catch up on that along with the mortgage arrearage. If you pay taxes separately, you catch up with the taxing authority directly, as part of your 3-to-5 year payment plan. Both your mortgage lender and the taxing authority have to cooperate, as long as you fulfill your Chapter 13 obligations. 

Conclusion

Chapter 7 helps very directly, by discharging other debt so that you can better afford to pay your mortgage. Chapter 13 helps by providing a better way to deal with especially dangerous debts that Chapter 7 doesn’t handle well.

 

Bankruptcy Writes Off Vehicle Accident Claims, Unless Intoxicated

March 25th, 2019 at 7:00 am

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

 

Vehicle Accident Claims

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

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

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

Accident Claims of Unknown Amounts

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

Bankruptcy law makes that clear.

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

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

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

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

The Intoxication Exception

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

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

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

3 Practical Twists

1) Only Applies to Unlawful Operation

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

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

2) Property Damage

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

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

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

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

3) Boating and Flying Accidents

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

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

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

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

Code of Federal Regulations, Title 14, Section 91.17

 

Bankruptcy Does Not Write Off Child or Spousal Support Debts

March 11th, 2019 at 7:00 am

Child support and spousal support debts cannot get written off in bankruptcy. But is your specific divorce debt legally considered support? 

 

We’re in a series of blog posts about special kinds of debt which bankruptcy may not discharge—write off.  So far we’ve covered criminal fines and restitution, and income taxes.

Child and spousal support are more like criminal debts than like income taxes. Bankruptcy simply does not discharge a criminal debt, as long as it really is a criminal, not civil, obligation.  Bankruptcy does discharge income tax debts that meet certain conditions. Bankruptcy simply does not discharge child and spousal support, IF it fits bankruptcy’s definition of support.

No Discharge of Support

Bankruptcy law is clear that neither Chapter 7 “straight bankruptcy” nor Chapter 13 “adjustment of debts” discharges support debts.

Section 523 of the U.S. Bankruptcy Code lists the “Exceptions to discharge.” It includes that “A discharge under [Chapter 7] does not discharge an individual debtor from any debt—(5) for a domestic support obligation… “ Section 523(a)(5).

Chapter 13 says the same thing by incorporating this Chapter 7 exception to discharge in its own list of exceptions.  Section 1328(a)(2).

What’s Considered Support in Bankruptcy?

So if you owe a “domestic support obligation,” you’re not getting out of it through bankruptcy. But what does that phrase mean? What does it include and what might if not include?

The Bankruptcy Code’s definition of “domestic support obligation” is 221 words long, containing 10 clauses. Section 101(14) of the Bankruptcy Code.  It appears to be a broad definition, covering anything that would sensibly be considered child or spousal support. For example, the debt could be owed not just to your ex-spouse or your child, but also to a current spouse (through a separation agreement) or to the parent, legal guardian, or responsible relative of a child (based on a court order of support, even if not biologically your child). In other circumstances, to be considered support the debt does not necessarily need to be based on a court order. It can be based on a separation agreement or “a determination made in accordance with applicable nonbankruptcy law by a governmental unit.”

Yet there are some limitations. For example, support obligations are often assigned for collection to someone other than the ex-spouse or child. Usually it’s assigned to a state or county support enforcement agency—then it’s still considered support. However, a support obligation that was “assigned to a nongovernmental entity” for collection is no longer considered support in bankruptcy. That is, it isn’t “unless that obligation [was] assigned voluntarily by the spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative for the purpose of collecting the debt.” Section 101(14)(D).

Obligations “In the Nature of” Child or Spousal Support

Sometimes a domestic relations court will call something support that really isn’t.  The bankruptcy court does not have to accept what your divorce court labeled as support.

The definition of a “domestic support obligation” (that is, support) includes the requirement that it really be “in the nature of alimony, maintenance, or support” on behalf of the pertinent person. Section 101(14)(B). If it’s not, the debt may be dischargeable.

“Support” That Might Be Dischargeable in Bankruptcy

For example, a debt that’s labeled as support might not really be “in the nature” of support if it’s actually a “property settlement” obligation that’s mislabeled as spousal or child support.

A property settlement obligation involves the resolution of a marital asset or debt. For example, you may owe money to your ex-spouse in return for receiving more than your share of marital assets. Or you may owe in return for your ex-spouse taking on what had been a joint debt. If a divorce judge requires you to pay “support” for what is really a property settlement, it may be discharged in bankruptcy.

The Difference This Can Make

Chapter 7 discharges neither support nor property settlement debts.  But Chapter 13 can discharge property settlement debts.

So if you have obligations called “support” but which are not “in the nature of support,” a Chapter 13 is worth looking into. Chapter 13 may especially be worthwhile if the debt at issue  is large.

Conclusion

If you owe a debt labeled as support by your divorce court, most of the time it will indeed be “in the nature of” support. But not always.

You can see that the interplay between divorce law and bankruptcy can get complicated. Talk with your bankruptcy lawyer about all of your divorce obligations to get all the relief you’re entitled to.

 

Criminal Fines and Restitution Not Written Off in Bankruptcy

February 25th, 2019 at 8:00 am

Bankruptcy does not write off criminal fines or restitution. But it can help by writing off other debts so you can pay crucial expenses.

 

If you owe criminal fines, penalties, forfeiture, or restitution, bankruptcy does not help you directly with those debts. But bankruptcy can still provide you essential help in paying for essential expenses, including criminal related ones.

The Criminal Fines and Restitution Exception

Neither Chapter 7 “straight bankruptcy” nor Chapter 13 “adjustment of debts” writes off criminal fines, penalties, forfeiture, or restitution.

Under Chapter 7 any “fine, penalty, or forfeiture” owed to “a governmental unit” is excluded from discharge (bankruptcy write-off). Section 523(a)(7) of the U.S. Bankruptcy Code.

(The only exceptions are if the debt is “compensation for actual pecuniary loss” or certain tax penalties. These are narrow exceptions that are beyond what this blog post covers.)

Criminal restitution is also not written off in Chapter 7. Excluded are debts “for any payment of an order of restitution issued under title 18, United States Code.” Title 18 is the main criminal code for the federal government. Courts have extended this to include state criminal restitution as well.

Chapter 13 excludes from write off “any debt… for restitution, or a criminal fine, included in a sentence on the debtor’s conviction of a crime.”  Section 1328(a)(3) of the Bankruptcy Code.  (In the past Chapter 13 did allow some criminal debts to be written off. But about 25 years ago Congress changed the law.)

Bankruptcy May Still Provide Crucial Help

Even if filing bankruptcy would not write off your criminal debt(s), doing so may still be very worthwhile. Bankruptcy may in fact be an indispensable tool for dealing with your situation. If you’ve been criminally charged, here are two ways filing bankruptcy could significantly help.

1) Write Off Your Other Debts

If you’ve been charged with a serious crime you need to intensely focus your financial resources to deal with it. You need to fixate on how to pay for your defense—for an experienced criminal attorney and other related costs. If you’re like most people, you’ll need to consider whether to stop paying many or even all of your debts.

Often the best way to eliminate or greatly reduce your debt payments is by filing bankruptcy. Doing so allows you to immediately stop paying many or most of your debts.

If your criminal case has already finished, bankruptcy can also be extremely effective. You presumably have financial obligations to the criminal justice system that you absolutely must pay. These obligations may include criminal fines, restitution payments, probation or supervision fees, treatment costs, community service fees, and/or drug and electronic monitoring charges. If you don’t pay these the consequences can be catastrophic, including incarceration and other harsh penalties.  Writing off your other debts through bankruptcy can enable you to pay your court-required obligations.

2) Deal with Related Non-Criminal Liability

If the criminal allegations against you involve a victim, you may end up owing that person a debt. This debt would—unlike the criminal debts owed to the court—likely be civil damages that you may be able to write off in bankruptcy.

The truth is that there are other exceptions that may prevent you from writing off even civil damages. However, your filing of bankruptcy may persuade that person not to sue you. Or, if you’ve already been sued, it could lead to a better settlement for you.

That’s because:

  • You disclose the details of your financial distress in your bankruptcy documents, under oath. That may well quickly and convincingly show your adversary that pursuing you is not financially worthwhile.
  • Even if a civil claim against you might not be discharged in bankruptcy, it might be. You are putting up another hurdle for your adversary. He or she has to seriously consider whether it’s worth more money, time, and emotional effort to pursue you.
  • Filing bankruptcy can sometimes speed up the litigation process. Bankruptcy court litigation tends to be more streamlined and efficient than in state court, often much more so. Faster procedures lead to a quicker settlement or court decision. That saves you money, potentially a lot of money.
  • Almost always your adversary has to act very quickly to preserve the claim. If he or she fails to act, the civil claim will simply be written off.

 

Debts Not Written Off in Bankruptcy

February 18th, 2019 at 8:00 am

Most debts get written off—discharged—in bankruptcy. The only ones that aren’t are specifically listed in the Bankruptcy Code. 

 

Debts Covered by the Discharge

The basic rule is that all your debts get discharged in bankruptcy unless a particular debt fits a listed exception.

Focusing on Chapter 7 “straight bankruptcy,” you will likely receive an Order of Discharge within about 4 months of filing the case. The heart of this court order simply states that “A discharge…  is granted to [the debtor].”

So what are the listed exceptions—what debts are NOT discharged through the Order of Discharge?

Exceptions to Discharge

 Section 523 of the Bankruptcy Code covers “Exceptions to discharge.” There are two categories of exceptions:

1) debts which will still be discharged unless the creditor objects and prevails in that objection, and

2) debts which do not require objection by a creditor.

1) Debts Requiring Successful Creditor Objection

In this first category, “the debtor shall be discharged for [the] debt of a kind specified” “unless, on request of the creditor… , the [bankruptcy] court determines such debt to be excepted from discharge… .” Section 523(c)(1) of the Bankruptcy Code.

In other words, these kinds of debts DO get discharged unless ALL of the following are true:

  • the debt is “of a kind specified”
  • the creditor  requests a court determination
  • the court determines in favor of the creditor that the debt should be “excepted from discharge”

There are 3 kinds of debts of this sort in which a creditor can ask for a court determination about discharge of the debt:

  1. Fraud Debts: incurred when a debtor makes a misrepresentation or commits fraud to get a loan or credit. Section 523(a)(2).
  2. Theft, Embezzlement, Fraud in a Trust Relationship: stealing from anyone, such as an employer or business partner, and especially from someone in a fiduciary relationship. 523(a)(4).
  3. Willful and Malicious Injury: intentionally and maliciously harming a person or business, and/or property. 523(a)(6).

Timely and Successful Objection

How does a creditor ask for a court determination that a debt falls within one of these 3 kinds? It files a formal “adversary proceeding”—a type of limited lawsuit—in the bankruptcy court. It has to file this within a strict deadline—usually within 60 days after a scheduled meeting of creditors. If the creditor received appropriate notice of the bankruptcy case but doesn’t object by this deadline, the debt is discharged forever.

And if a creditor does timely object, how does the bankruptcy court decide whether a debt should get discharged? Unlike most lawsuits on a debt, the court does NOT need to determine whether the debtor owes the debt. THAT’s generally assumed. Rather the question is whether the facts support the narrow grounds of fraud and such which make the debt not dischargeable. If the creditor cannot prove the necessary facts, the debt will still be discharged.

2) Debts Not Requiring Creditor Objection

The kinds of debts that are discharged unless a creditor objects generally involve some bad action by a debtor towards the creditor. The general idea is that if a creditor cares about being wronged it will raise an objection to the discharge.

But in a second category of not-discharged debts the creditors do not need to object. That’s because the kinds of debts in this category are not dischargeable simply because of the nature of the debt. There doesn’t need to be a court determination. It’s usually quite straightforward whether or not the debt belongs to these nondischargeable types of debt.

Here’s a list of debts that don’t get discharged even without creditor objection:

  1. Criminal fines, fees, and restitution
  2. Income taxes, and other forms of taxes, under certain conditions
  3. Child and spousal support
  4. Student loans that don’t cause an “undue hardship”
  5. Claims for bodily injury or death from driving while intoxicated
  6. Debts not listed in your bankruptcy schedules, under certain conditions

There ARE occasionally questions about whether the debt at issue fits the not-discharged definition. But it’s usually clear whether a debt is, for example, a criminal fine or child support. Our next 6 blog posts will go through each of these types, focusing on situations where there may be some ambiguity.

Note: Today’s blog post was about the discharge of debts in a Chapter 7 case. The debts discharged in a Chapter 13 case are slightly broader. We’ll address the difference in an upcoming blog post.  

The Surprising Benefits: Chapter 13 Potentially Discharges Divorce Property Settlement Debts

September 10th, 2018 at 7:00 am

Chapter 13 can write off some or all of the non-support debts included in your divorce. But it comes with some potential disadvantages. 


Last week we explained how Chapter 7 cannot write off non-support divorce debts, but Chapter 13 can. We said if you owe a significant debt created by your divorce decree (for other than child or spousal support) you should talk with a bankruptcy lawyer. Don’t necessarily think that Chapter 13 is your best option with this kind of debt. Chapter 13 has advantages and disadvantages. We get into these now so you can start to see which option is best for you.

Non-Support Divorce Debts

Support debts are not discharged (written off) under either Chapter 7 or 13. Only non-support debts can be discharged under Chapter 13 (and not Chapter 7). So we need a quick, practical reminder what we mean by non-support debts.

We said last week:

Most non-support debts are those obligations in your divorce decree related to the division of property and the division of debts between you and your ex-spouse.

The Division of Property

… often in a divorce one ex-spouse receives less assets than the other. For example, you may receive a vehicle worth much more than your ex-spouse. Or you may get the family home. So you’re required to pay your ex-spouse half of the equity in the home to make up the difference. Whatever specific amount you’re required to pay in these kinds of situations is a non-support divorce debt.

The Division of Debts

Also, for whatever reason your divorce decree may have required you to pay a debt arising from the marriage. This debt may be a jointly-owed one, one that you owe individually, or even one that only your ex-spouse owes. The decree orders that your ex-spouse no longer has to pay that marital debt. You have to pay it by yourself.

… . This obligation by you to your ex-spouse to pay the debt is a non-support divorce debt.

Disadvantages of Chapter 13

The main advantage of Chapter 13 for this kind of debt is that you could avoid paying most or even all of it. Also, Chapter 13 has many other potential advantages over Chapter 7, some of which may well apply to your situation. These are beyond the scope of today’s blog post.

Let’s focus instead on three main potential disadvantages of Chapter 13 for this kind of debt. These are: 1) delay in discharge, 2) risk of no discharge, and 3) likely partial payment of the nonsupport divorce debt.

Delay in Discharge

A Chapter 13 case takes a lot, lot longer than a Chapter 7 one. It takes years instead of months. That is, a Chapter 13 case usually doesn’t finish for 3 full years, and often goes as long as 5 years. Contrast that with a Chapter 7 case, which usually takes less than 4 months from filing date until completion.

And you don’t get a discharge of your debts—including the non-support divorce debt(s)—until the end of the case.  Again, that’s 3 to 5 years.

Usually your ex-spouse can’t do anything to collect on that debt in the meantime. So the delay may not be much of a practical problem. But you’re still living in a sort of limbo in the meantime.

If you have other reasons to be in a Chapter 13 case the delay may well be worthwhile. Or if the amount of you non-support divorce debt is very large that alone may make the delay worthwhile. Just be aware of this downside.

Risk of No Discharge

Almost all Chapter 7 cases, especially those in which the person is represented by a lawyer, get successfully completed. But Chapter 13s are riskier. That’s because they involve a monthly payment plan that you and your lawyer put together, it gets court-approved, and then you pay on it for 3-to-5 years. In the right situations a Chapter 13 case can accomplish much more than Chapter 7. But there are more things that can go wrong.

As we said above, you don’t get the discharge of debts until the end of the case. So you have to get to the end successfully to discharge the non-support divorce debt. There’s a risk that you would not get to the discharge.           

Likely Partial Payment of the Non-Support Divorce Debt

The Chapter 13 payment plan referred to above very seldom results in all debts being paid in full. In fact, in some cases you’d pay certain debts nothing before they get permanently discharged. In the majority of cases a non-support divorce debt would get paid in part, but often only a small percentage.

Non-support debts would be treated like all your other “general unsecured” debts. These are all debts that are not secured by collateral and are not “priority” debts (such as recent income taxes) which must be paid in full. All of your “general unsecured” debts are put together into a single pool of debt. The extent to which you’d pay that pool of debt would be based on a bunch of factors, such as:

  • how much you can afford to pay all your creditors per month throughout the length of the case
  • the length of your Chapter 13 plan, generally 3 years or 5, determined by your income
  • the amount of your priority debts, which you paid in full before the “general unsecured” debts get paid anything
  • how much your plan must pay in administrative expenses—the Chapter 13 trustee fees and the attorney fees you did not pay before your case was filed—all paid before paying any of the “general unsecured” debts

As a result sometimes the “general unsecured debts, including your non-support divorce debts, get paid nothing at all. All of your available money is exhausted elsewhere. (This assumes your local bankruptcy court allows such “0% plans”). On the other hand, in rare cases the “general unsecured” debts get paid in full. This is more common when you have little or no priority debts and the general unsecured debts are relatively small. Most of the time your non-support divorce debts get paid a relatively small portion of the total you owe. It depends on all these factors.

 

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