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Archive for the ‘lawsuit’ tag

The Surprising Benefits: Fraud Debt Collections in Bankruptcy

July 16th, 2018 at 7:00 am

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

 

Most Debts are Discharged (Permanently Written Off) in Bankruptcy

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

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

The Fraud Exception

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

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

What Makes for a Fraudulent Debt?

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

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

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

For example:

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

What Happens When a Creditor Alleges Fraud

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

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

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

Staying Allegedly Fraudulent Debts

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

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

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

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

 

A Creditor’s Challenge to the Automatic Stay to Pursue a Lawsuit

February 21st, 2018 at 8:00 am

A creditor may ask the bankruptcy court to let another court finish a lawsuit about liability and/or the amount of damages. 

 

“Relief from the Automatic Stay”

Our last blog post was about the possibility of a creditor asking for “relief from the automatic stay.” The automatic stay refers to the immediate protection you receive from debt collection as soon as you file bankruptcy. (See Section 362 of the U.S. Bankruptcy Code about the “Automatic stay.”)

So, a creditor’s motion for “relief” from that protection refers to a creditor’s request to the bankruptcy court for permission to pursue a debt in spite of your bankruptcy filing. In certain circumstances a creditor may have legal grounds to ask for an exception to the automatic stay protection. (See Section 362(d) of the Bankruptcy Code about “relief from the stay.”)

Last time we focused on the most common situations in which creditors ask for “relief from the automatic stay.” That’s when a creditor wants to pursue the collateral securing the debt. For example, it wants to repossess your vehicle or foreclose on your home because you aren’t current on monthly payments. Once you file bankruptcy creditors can’t take such actions until asking for and getting “relief from stay” from bankruptcy court.

Relief for Creditor for Reasons Other than Pursuing Collateral

However, there are other reasons for creditors to ask for relief from stay. The automatic stay covers more than the protection of collateral from your creditors. It also stops most lawsuits against you to collect a debt. In most cases your bankruptcy filing will permanently stop that lawsuit. But sometimes, under limited circumstances, a creditor which has sued you may ask for bankruptcy court permission to finish that lawsuit.

 We cover two of these limited circumstances today (and the rest in our next blog post).

Reasons to Ask for Relief from Stay to Finish a Lawsuit

A creditor might ask to finish a lawsuit in order to determine:

  1. whether you are at all liable on a debt—liability
  2. if you are liable on a debt, the amount you owe—the damages

1. Determining Liability Outside of Bankruptcy Court

Someone or some business may think you owe something to it, but you dispute that you do. You don’t think you owe anything. You think you have no liability at all.

If this dispute about liability is already being addressed in a lawsuit when you file your bankruptcy case, sometimes it makes sense to finish determining liability in that lawsuit. Your bankruptcy filing would almost always stop that lawsuit. The creditor would have to get the bankruptcy court’s permission to continue the lawsuit to determine whether you were liable.

For example, you may dispute any liability on a large credit card debt run up by your ex-spouse without your knowledge. If the cred card company sues you to collect the debt, you may be able to establish in that lawsuit that you owe nothing on that debt. The creditor may believe that you are liable and wants to determine that through the lawsuit. It may file a motion for relief from stay to do so in spite of your bankruptcy filing. (It would more likely do so if it could get money out of your bankruptcy case. That could happen in an asset Chapter 7 case or in a Chapter 13 case paying unsecured debts.)

2. Determining the Amount of a Claim

You may instead be in a lawsuit in which you admit that you owe something but dispute the amount owed. The creditor may ask for relief from stay to finish the lawsuit in order to determine the amount you owe.

For example, you were in an accident in which you admit some liability but dispute the amount of damages. You admit that you were at least partially at fault but dispute the damages you caused and their dollar amounts. In this situation the creditor may ask the bankruptcy court for relief from stay to finish the pending lawsuit to determine the amount of damages for which you are liable.

As in the situation above, the creditor would not bother asking for relief from stay if the debt is simply going to get discharged (written off) with nothing paid to it no matter how large the debt. It’s only worth pursuing the matter if the creditor can anticipate getting paid something. Again, this would be much more likely in an asset Chapter 7 case or a Chapter 13 case paying general unsecured debts.

Will the Creditor Get Relief from the Stay?

In both of these situations, the bankruptcy court may or may not grant relief from stay to finish the lawsuit.  It mostly depends on which court could more efficiently finish resolving the dispute—the original court or the bankruptcy court. If the liability or damages dispute has come close to being litigated in the original court, the bankruptcy court may just let the first court finish the lawsuit. That’s also more likely if that court has more experience dealing with those kinds of cases than a bankruptcy court. That’s often the situation. But it a lawsuit has just started, and the dispute is one that the bankruptcy court is experienced in handling, it may not give relief to the creditor but instead resolve the liability or damages dispute itself.

 

Adversary Proceedings by the Debtor

March 8th, 2017 at 8:00 am

Sometimes it’s in your best interest to force an issue in bankruptcy court by, in effect, suing a creditor in an adversary proceeding. 


The last two blog posts have been about you as a debtor being hit by an adversary proceeding. A creditor may try to use that tool to prevent you from legally writing off a debt.  A Chapter 7 or Chapter 13 trustee may try to kick you out of bankruptcy altogether if you don’t follow the rules. Even though these situations are relatively rare, you still want to get advice so that you can avoid them.

However, you can also use an adversary proceeding as a tool to benefit you in certain circumstances. You have some significant practical advantages in bankruptcy court that you would not have in normal state court.

The Advantage of a Limited Issue

The disputes that you can and would want to raise are specific, limited ones. Issues like whether you can discharge—legally write off—a debt. Or whether a creditor violated bankruptcy law and has to pay you damages.

When you have a focused issue such as these, your cost for resolving the dispute are less.

For example, take the issue of whether you can discharge a debt. Most debts are clearly either discharged in bankruptcy or they are not. If you owe some spousal support, that can’t be discharged. There’s nothing to dispute.

But sometimes it’s not so clear. What if you were obligated to sign over a vehicle to your spouse, and there is some indication that your spousal support was reduced for the first year as a result? You haven’t yet signed over the vehicle. Now you are filing a Chapter 13 case which allows you to discharge divorce property settlements. You want to keep the vehicle for yourself. Is the divorce obligation to sign over the vehicle a spousal support obligation or a property settlement one?

The bankruptcy court gets to decide. The issue is a narrow one: is that obligation “in the nature of support” or not for bankruptcy purposes? The divorce court has already determined that divorce law says your spouse gets the vehicle. This is a debt you owe—everybody accepts that. Now the issue is simply whether or not it is a debt that bankruptcy law makes dischargeable. Again, under all of the facts, is it “in the nature of support”? The entire dispute focuses on that single issue, making court resolution of that relatively straightforward and quick.

The Advantage of an Efficient Court

The bankruptcy disputes are resolved quickly because of some practical aspect of bankruptcy litigation.

First, it’s a federal court so resources tend not to be stretched as thin as in many state courts. Often state courts cases move incredibly slowly simply because there are not enough judges to go around.

Second, bankruptcy courts do nothing but bankruptcy. State courts have to deal with a huge range of criminal and civil matters. For constitutional reasons, the criminal cases often take precedence on the court’s calendar. On the civil side, theses courts deal with absolutely everything from apartment evictions to mega-million dollar business disputes. In bankruptcy court the issues are comparatively very limited. So systems have been established to deal with them efficiently. And the bankruptcy judges are essentially experts at these issues and can resolve them relatively speedily. So you get your dispute resolved fast, significantly reducing everybody’s costs.

The Advantage of a Lawyer Already in Your Corner

One of the biggest challenges when you are considering whether to bring a lawsuit is finding a good lawyer to represent you. It’s certainly one of the biggest practical problems if money is tight.

But when you are filing any kind of bankruptcy case, virtually always you’d have retained a lawyer for that purpose. You’ve presumably built up a trusting relationship. You’re likely being hugely benefitted financially from the debts you are discharging. So when you’re confronted with the question whether you should sue a creditor (by filing an adversary proceeding against it), you have a lawyer at your side to advise you about it. He or she is already familiar with your situation. The lawyer is very likely also very familiar with the focused legal issue at hand.

Conclusion

So resolving a dispute in bankruptcy court is to your advantage because you have your lawyer at the ready, an efficient and quick court, and narrow issues to resolve. What are those relatively narrow issues that may make suing a creditor in bankruptcy worthwhile? We’ll discuss them in our next blog a couple days from now.

 

Statutory Liens in Chapter 7

January 18th, 2017 at 8:00 am

Statutory liens survive bankruptcy. Chapter 7 may still be able to help in various ways and be your best solution.  

 

In our last blog post we introduced statutory liens as a less common but still potentially important kind of lien. A statutory lien on your home is one that is usually imposed on your home without court action. It’s imposed when you meet certain conditions specified in a written law—a statute. The most common examples are income tax liens, contractor and mechanic’s liens, and homeowners’ association liens.

The most important practical concern about statutory liens is that they cannot be removed from your home in bankruptcy like judgment liens often can. Nevertheless, bankruptcy can often help solve your financial problems if you have a statutory lien. Today we show how that can happen under Chapter 7 “straight bankruptcy,” tomorrow in a Chapter 13 “adjustment of debts.”

Chapter 7 Discharge of Personal Liability

Although Chapter 7 does not remove a statutory lien, it may take away your personal liability on the underlying debt. Bankruptcy may “discharge” the debt. This is an important and possibly confusing distinction.

There’s the debt—your personal liability to pay the money owed. And then there’s the lien on your home imposed because you didn’t pay the debt.

Some debts that result in statutory liens can be discharged and some cannot. It depends on the type of debt and often the circumstances of each case.

With income taxes, you can discharge the tax debt if it meets certain conditions, usually based on its age. But you can’t discharge more recent income taxes.

You can usually discharge debts underlying contractor/mechanic’s liens for work done on or materials supplied for your home. But sometimes the contractor or supplier might try to challenge the discharge based on allegation of fraud or misrepresentation.

Bankruptcy may discharge homeowners’ association fees and assessments, but they continue to be assessed as long as you own the property, even after you file your Chapter 7 case. They present special issue which we’ll address in a separate upcoming blog post.

The Benefit of Discharge

If you can discharge the debt underlying your statutory lien, that may give you major advantages.

First, if you are surrendering your home, the lien stays on the home but your debt goes away.

Let’s say you put a huge amount of money into trying to fix up a fixer-upper home. That resulted in major bills to a couple subcontractors and suppliers. The house has turned into a major liability and you’re throwing in the towel, surrendering it to your mortgage lender.  You would likely be able to discharge those debts to the subcontractors and suppliers. The contractor/mechanic’s liens would stay with the surrendered house, and be out of your life.

Second, sometimes you can keep the home and the lien goes away, eventually.

Let’s say you owe an income tax that is old enough that it qualifies for discharge. But the IRS or state has recorded a tax lien. Also assume that your home is seriously underwater—the first mortgage is lots more than the home is worth. There is effectively no equity for the tax lien to attach to. After your Chapter 7 case discharges the underlying tax debt the tax lien survives. But the IRS/state may recognize that its lien has no equity backing it up. It may do nothing until the lien expires. The home may increase in value sufficiently in the meantime to give them more leverage. They may even try to enforce their lien in spite of the tax debt being gone. So be sure to talk with your bankruptcy lawyer directly about this.  

The Big Indirect Benefit of Chapter 7

You may not be willing to give up your home to get away from the statutory lien. You may not be able to discharge the underlying debt. Or either way you may need to pay to get rid of the lien regardless. That’s where the indirect benefit of Chapter 7 comes in. Sometimes it’s worth filing a Chapter 7 case to get rid of all or most of your other debts so that afterwards you can concentrate all your financial energy on one debt. It may make sense to file bankruptcy on your other debts so that you can pay the one with the statutory lien on your home. That may be best solution for your overall situation.

 

A Sample Judgment Lien, Undone

January 9th, 2017 at 8:00 am

Here’s an example showing why a judgment lien on your home is dangerous, and how bankruptcy can solve this problem.   

 

The last two blog posts have been about judgment liens on a home: the trouble they cause and how bankruptcy gets rid of them.

Today we’ll give examples both of judgment lien trouble and of bankruptcy’s solution.

The Trouble Caused by a Judgment Lien

Brent and Sandra Taylor own a $290,000 home with a $250,000 mortgage. They have a lot of other debt. Besides the mortgage they owe mostly medical bills and credit cards—$80,000 and $55,000 of them, respectively, $135,000 altogether.

One collection agency collecting on $20,000 of the medical bills sued them six months ago. Brent and Sandra didn’t respond to the lawsuit. They figured they definitely owed those medical bills and so had no reason to respond or object. Plus they had nothing to offer in settlement, either as a lump sum or in monthly payments.

They didn’t realize that in their state, like in many states, a judgment automatically turns into a judgment lien on real estate owned by the judgment debtor. The collection company recently informed them there was a judgment lien on their home in the amount of $22,500. The extra amount was for the collection agency’s attorney fees and other legal costs, plus ongoing interest.

The Taylors are now getting calls from the collection agency making them believe they’re going to lose their home. They’ve gotten the impression that the judgment lien can be foreclosed on since they have enough equity in the home to cover it. They’ve been pressured to refinance or sell their home. Because of their debts and inadequate equity, they can’t qualify for any refinancing. So they think they have to sell the home.

Their Dilemma

Even if the Taylors would somehow succeed in getting refinancing, they would have to pay off the judgment lien from the refinancing proceeds.  That would just about wipe out their equity.(Again, this makes a refinancing virtually out of the question.)

Or if they would sell their home, the judgment lien would have to be paid in full out of the sale proceeds. That’s because valid judgment liens must be paid before the homeowners get anything from the property.  After paying off the judgment lien and other costs of sale, they would have very little left over to get new housing. Certainly nowhere near enough for the down payment on a home; likely barely enough for a few months of rent.

Brent and Sandra hate the whole idea of selling their home. In their housing market renting would cost more, especially when accounting for the mortgage interest tax deduction. Plus they know it would be many years before they could again qualify for a mortgage, especially with tighter financing standards these days.

Partly Saved by the Homestead Exemption

So they go to see a bankruptcy lawyer. The first thing they learn is that they are entitled to a homestead exemption that provides certain protections for their home equity.

Assume that in their state their homestead exemption amount is $50,000. (These amounts vary widely so you need to find out from an attorney how much you qualify for. Determining this can often be more complicated than you think.)

One protection that $50,000 homestead exemption provides is that the collection agency actually can’t foreclose on the judgment lien. (The collection agency purposely gave Brent and Sandra the wrong impression on this.) The collection agency can’t foreclose because Brent and Sandra have $40,000 in equity ($290,000 home value minus the $250,000 mortgage). All of that $40,000 of equity is protected by the $50,000 homestead exemption.

But that still leaves Brent and Sandra with a judgment lien, increasing over time, which would have to be paid in full whenever they sell the home. And they still also have all the rest of their debts, most of which they are far behind on. Before long will come more lawsuits, and more judgment liens.

Judgment Lien Avoidance

As explained in our last blog post, if the Taylors filed a bankruptcy case, the judgment lien could be “avoided.” It could be completely taken off their home’s title.

That’s because all of that $22,500+ judgment lien “impairs” their homestead exemption. That is, all of the equity that this judgment lien eats into is protected by the Taylor’s $50,000 homestead exemption.

The Good Conclusion

So, if they filed a Chapter 7 “straight bankruptcy” case, most likely Brent and Sandra would be able to discharge (permanently write off) all their $135,000 or so in medical and credit card debts. They would “avoid” the $22,500+ judgment lien so it would be permanently off their home title. Because they want to keep their home they would continue owing and paying their mortgage.

But they would have no other debts, and no judgment lien. Brent and Sandra Taylor would have a fresh financial start.

 

Undoing a Judgment Lien

January 6th, 2017 at 8:00 am

Bankruptcy can do more than forever discharge your debts. It can undo some bad creditor actions, like a recorded judgment lien on your home.


If a creditor has sued and gotten a judgment against you, it likely now also has a judgment lien against your home. In our last blog post a couple of days ago, we got into how dangerous judgment liens can be. We also explained how you may have a judgment lien on your home and not even know it. Given how dangerous they can be, it’s good that bankruptcy often can destroy judgment liens.

The Benefits of Bankruptcy

Filing bankruptcy gives you four big benefits in dealing with creditor judgments and judgment liens. These benefits apply to both kinds of consumer bankruptcy—Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.”

1. Filing bankruptcy stops the creditor from enforcing the judgment itself. It can’t start or continue garnishing your paychecks or using virtually any other methods of collecting the debt.

2. Bankruptcy also stops your creditor from enforcing the judgment lien itself by foreclosing on your home.

3. Most of the time bankruptcy results in the discharge (legal write-off) of the underlying debt.

4. Often the judgment lien itself can be gotten rid of forever through the judgment lien “avoidance” procedure. The rest of this blog post is about this important procedure.

Judgment Lien “Avoidance”

The getting rid of—“avoidance”—of a judgment lien is quite a remarkable procedure. Bankruptcy generally only discharges debts; it doesn’t get rid of liens. Bankruptcy discharges most monetary obligations; it doesn’t usually get rid of creditors’ property rights in collateral.

Consider a vehicle loan lender’s lien on your vehicle’s title. That lienholder’s lien doesn’t go away when you file bankruptcy. Instead you must satisfy the lien. You either continue making payments to keep your vehicle until the debt is satisfied and the lien is released, or deal with the lien through a Chapter 13 “cramdown” by paying off the lien. Or else you surrender the vehicle to the creditor and satisfy the lien that way.

Yet Judgment Liens Can Be “Avoided” in Bankruptcy

Judgment liens are different.

They can be “avoided”—altogether undone—in bankruptcy under certain circumstances that are often not difficult to meet.

Those circumstances involve when a judgment lien “impairs,” or eats into your homestead exemption.

A homestead exemption is a protection from creditors that the law provides for your home. It is usually expressed as a certain dollar amount of home value or home equity.

For example, assume you own a $300,000 home with a $260,000 mortgage, and so the home has $40,000 of equity. Assume also that where you reside you are allowed a $50,000 homestead exemption. That $50,000 protection from the homestead exemption is more than enough to cover the entire $40,000 of home equity.

So if a creditor sued you for $15,000 and got a judgment in that amount, it would likely record a judgment lien on your home also in that same $15,000 amount.

Because you have equity of $40,000, normally that $15,000 judgment lien would eat into that $40,000 of equity. The judgment lien would encumber $15,000 of your home equity, effectively reducing your home equity by $15,000.

But because that $15,000 of equity is protected by your homestead exemption, that judgment lien “impairs” the homestead exemption. As a result the judgment lien can be “avoided”—gotten rid of—through bankruptcy.

The Specific Conditions for Judgment Lien “Avoidance”

To be clear, here are the conditions you must meet:

  • The real estate to which the judgment lien has attached is your “homestead,” entitling you to the homestead exemption.
  • The lien must be a “judicial lien.” That’s defined in the Bankruptcy Code as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”
  • This “judicial lien” cannot be for child or spousal support, or for a mortgage foreclosure.
  • As described in the above example, the judgment lien at issue must “impair” the homestead exemption. The lien has to cut into the equity (or home value) protected by the applicable homestead exemption.  

Need a Motion to “Avoid” the Judgment Lien

Going through the basic bankruptcy procedure will not of itself get rid of a judgment lien. The “avoidance” requires a legal procedure dedicated specifically for that purpose. It’s usually a motion filed in the bankruptcy court by your bankruptcy lawyer. Otherwise the judgment lien would continue to attach to your home after your bankruptcy case is over.

The “avoidance” procedure needs to be done while your Chapter 7 or 13 case is active and open. Otherwise the closed case would have to be reopened. Assuming that the court allows the reopening, it would cost you hundreds of dollars more in court fees. Obviously it’s important to get it done on time.

 

The Dangerous Judgment Lien

January 4th, 2017 at 8:00 am

A judgment lien effectively converts a debt that was secured by nothing into one secured by your home. 


Has a creditor sued you and gotten a judgment against you? If so, and you own a home, most likely there is now a judgment lien against your home.

The Dangerous Judgment Lien

What’s a lien? It attaches an asset you own to a debt you owe, and secures the debt with it.

judgment lien, in most states, attaches your home to the amount you owe to the judgment-holding creditor. Usually without your consent, your home then secures that debt.

A judgment lien gives the creditor huge leverage to make you to pay the entire debt. Not only pay the debt, but also the creditor’s attorney fees, its other costs for getting the judgment against you, and its constantly accumulating interest.

If you try to sell or refinance your home, the judgment lien forces you to pay the judgment.  That debt has to be paid—usually in full—out of the sale or refinancing proceeds. It comes straight out of money you would have otherwise received. A judgment lien can sometimes also prevent you from being able to do the sale or the refinance altogether.

Under some circumstances and in many states, the creditor can foreclose on the judgment lien even if you don’t sell or refinance the home. You could lose your home if you don’t come up with a way to quickly pay off the judgment amount.

Stealth Judgment Liens

Usually you know it when you’ve been sued by a creditor. You are served with papers that make that clear.

But sometimes you are not personally served and don’t know about the lawsuit. Or you may receive papers but don’t read them closely. Or you realize you’ve been sued but then nothing seems to happen and you don’t find out what did in fact happen with the lawsuit.

If you don’t respond by the deadline stated in the papers you receive, the creditor automatically wins the lawsuit. A judgment is entered against you in the amount the creditor sued you for. A judgment lien is then placed on your home in that amount plus the creditor’s often-substantial costs.

If you are not paying attention, you could easily have no idea that the court entered a judgment against you. Even if you are paying close attention, you are not necessarily informed that a judgment has been entered. And even if you do know about the judgment, you may not find out that your home now has a lien on it in the amount of the judgment.

Judgment Liens after Settlement

You could also have a judgment lien on your home even if you closely cooperated with a creditor. Have you ever settled with a creditor, agreeing to make monthly payments on a debt? The settlement could have included the creditor’s right to enter a judgment against you. That way it doesn’t have to go through the costs and delay of suing you if you don’t make the agreed payments.

Even if a judgment was not entered at the time of the settlement, it’s standard practice that one is entered automatically if you fail to make the agreed payments on time.

These kinds of settlements can be entered into whether or not the creditor filed a lawsuit before the settlement. So, if you’ve entered into a settlement with a creditor, you could easily have a judgment lien on your home. And that could be true even if you are current on your settlement payments.

The Limitations and Benefits of Bankruptcy

Bankruptcy writes off (“discharges”) most kinds of debts, but is generally not very good at getting rid of liens. Liens are creditors’ rights against your property, rights that the bankruptcy law generally respects. For example, if you want to keep your vehicle in bankruptcy, you generally have to pay off its lienholder.

But in many situations you CAN get rid of a creditor’s judgment lien on your home. We’ll show in a couple days in our next blog post.

 

“Priority” Debts for Injuries from Driving while Intoxicated

September 16th, 2016 at 7:00 am

If you injured someone by unlawfully driving while intoxicated, the resulting obligation can’t be discharged in bankruptcy.  

 

Our last 5 blog posts have been about how bankruptcy deals with “priority” debts. The specific types of priority debts we’ve focused on so far are child/spousal support, wages owed employees, and income taxes. See Sections 507(a)(1),(4), and (8) of the U.S. Bankruptcy Code.

Today we look at another type of priority debt, one that many people don’t realize is a priority one. It is the newest priority debt, described as such by Congress in the last major overhaul of the Bankruptcy Code in 2005.

Unlawful Operation of a Vehicle while Intoxicated

The Code’s definition for this type of debt is a claim “for death or personal injury resulting from the operation of a motor vehicle or vessel if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance.”

So, if you drive while legally intoxicated, causing injury or death, that party’s claim against you is a priority debt.

So What? What Does It Matter?

There are two main legal consequences, one under Chapter 7 and one under Chapter 13.

First, under a Chapter 7 “straight bankruptcy” case your trustee pays your priority debts in full before paying other debts. But usually all of your assets are “exempt,” protected from bankruptcy trustee liquidation. So there’s no money for the trustee to pay any creditors, including the priority debts. So there’s no practical benefit to the driving-while-intoxicated debt being a priority debt in that situation.

Second, under a Chapter 13 “adjustment of debts” your court-approved payment plan must “provide for the full payment” of all debts “entitled to priority.”  So you have to budget enough to pay off the driving-while-intoxicated debt during the case’s 3 to 5 years. You can and must pay that in full before paying anything on non-priority unsecured debts. But if that debt is very large, you may not have enough disposable income to pay it off in time. As a result a Chapter 13 case may not be feasible.

“Priority” vs. “Nondischargeable” Debts

But there’s another angle to this that’s probably even more important. One big theme of these last few blog posts has been whether a debt that is a priority debt also cannot be discharged (forever written off).

For example, all unpaid child/spousal support is priority debt, with the Chapter 7 and Chapter 13 consequences outlined above. And support also can never be discharged.

But some priority debts CAN be discharged. To use the example of our most recent blog post, if you owed unpaid wages to a former employee, that could be a priority debt. But most likely that type of debt would be dischargeable. If you filed a Chapter 7 case, the debt would likely be discharged.

How about debts for driving while intoxicated?

They’re like support obligations: they are both priority debts and nondischargeable.

The language from the Bankruptcy Code quoted above making these debts priority ones is very similar to language elsewhere in the Code making them nondischargeable. So, you can’t discharge a debt “for death or personal injury caused by the debtor’s operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance.” Section 523(a)(9).

The Bottom Line

Debts from driving while intoxicated can’t be discharged under either a Chapter 7 or 13. They must be paid in full within a Chapter 13 plan. These are a highly favored type of debts under the law.

Debt Secured by Judgment Lien Can Often Be Turned into an Unsecured Debt

August 15th, 2016 at 7:00 am

A judgment lien turns an unsecured debt into one secured by a lien on your home. Bankruptcy can undo that, and write off the debt.

 

Very Different Treatment of Unsecured Debts and Secured Debts

A couple blog posts ago we discussed how differently unsecured and secured debts are treated in bankruptcy.

Most debts that do not have a “lien” on any of your property or possessions are legally, permanently written off in bankruptcy. However with secured debts the lien that the creditor has in your asset is NOT USUALLY written off or affected in any way in bankruptcy. That means the creditor can take collection action against your asset through that lien after the bankruptcy case is completed. As a result usually you have to pay the debt.

But in certain situations bankruptcy CAN turn a secured debt back into an unsecured debt. We focus on another one of those situations today.

Erase a Lien in Bankruptcy is Extraordinary

It’s important to realize how extraordinary it is to be able to turn a secured debt into an unsecured one. It’s unusual even in bankruptcy. Most liens cannot be erased. Instead, after bankruptcy they often have to be paid either in full or in part.

So it’s quite special to be able to erase a judgment lien, write off the debt, and not pay anything.

Erasing a Judgment Lien

But this can only be done under certain circumstances. The good news is that for practical reason these circumstances apply to a large percentage of people filing bankruptcy who have a judgment lien on their home.

In order to get rid of a judgment lien, the liens must “impair your homestead exemption.” (See Section 522(f) of the Bankruptcy Code).

An Example of “Impairing Your Homestead Exemption”  

Here are the conditions that have to be met, applied to a hypothetical example.

  1. The judgment lien that is being gotten rid of must be attached to your “homestead.” That is legally defined differently in different states but generally means the place where you live. So assume you live in a home titled in your name, with a mortgage—that’s your homestead. In our example it’s worth $200,000 with a $180,000 mortgage, and so has equity of $20,000.
  2. The equity in your homestead must be protected by a “homestead exemption.” State and federal laws provide different amounts of protection for your home. It’s usually described as a certain maximum dollar amount of equity. In our example assume a homestead exemption of $30,000. Since that’s more than your $20,000 in equity, all of your equity is protected by the homestead exemption.
  3. The lien being removed must be a “judicial lien.” That’s defined in the Bankruptcy Code as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.” And that judgment lien can’t be based on child or spousal support, or a mortgage foreclosure. In our example you’ve been sued by a collection company for an unpaid $15,000 medical bill. You knew you owed the money so you didn’t respond to the lawsuit. So a judgment was entered against you, which turned into a judgment lien against your home. This is the kind of “judicial lien” that could potentially be removed in bankruptcy.
  4. That judgment lien must “impair the homestead exemption” to be able to get rid of it through bankruptcy. This generally means that the judgment lien attaches to equity that is protected by the applicable homestead exemption. In our example the $15,000 judgment lien attaches to the $20,000 in equity in the home.  ALL of that $15,000 of equity is included in the equity that is protected by the homestead exemption. So, the ENTIRE $15,000 judgment lien would be removed by filing bankruptcy. The underlying medical debt would be written off. You would owe nothing and the judgment lien would be gone.

 

Prevent a Creditor with an Unsecured Debt from Turning it into a Secured Debt

June 29th, 2016 at 7:00 am

Because of Chapter 13’s much more powerful automatic stay, its ability to prevent judgment liens and tax liens is extremely valuable.  

 

Our last blog post described ways that the “automatic stay”—your protection from creditors’ collection actions—is so much more powerful in a Chapter 13 “adjustment of debts” case than in a Chapter 7 “straight bankruptcy.”

One way that this Chapter 13 protection from creditors is better is simply that it lasts much, much longer than under Chapter 7. This benefit is also related to today’s topic, how Chapter 13 can permanently stop unsecured creditors from turning their debts into secured ones. This is an underappreciated advantage of filing a Chapter 13 case.  

Prevent Creditors from Turning Unsecured Debts into Secured Ones

Creditors with secured debts generally have much more leverage than those with unsecured debts. In a Chapter 7 case most unsecured debts get “discharged”—legally written off—without any payment required. In a Chapter 13 case unsecured debts are only paid if and to the extent there is any money left over during the course of the payment plan after paying secured creditors and special “priority” debts (such as unpaid child support and recent income taxes).

Creditors with unsecured debts have a variety of ways of turning those into debts secured against your assets. Two examples are judgment liens and income tax liens, which we’ll discuss more in a moment.

Those liens, as well as other kinds, can turn a debt that can simply be discharged into one that has to be paid in full or in part. Or even if it was a debt that could not have been discharged (such as unpaid child support or recent income taxes), once the creditor has a lien the debt is more dangerous for you, even if you file a bankruptcy afterwards.

Filing bankruptcy—either Chapter 7 or 13—prevents a creditor from converting its unsecured debt into a secured one. The same law—the “automatic stay”—that stops other forms of collection action against you immediately upon the filing of a bankruptcy case, also stops creditors from creating liens against your assets. The U.S. Bankruptcy Code states that filing a bankruptcy “petition… operates as a stay… of–… (5) any act to create… against property of the debtor any lien” that secures a debt existing at the time the petition is filed. (See Section 362(a)(5) of the Bankruptcy Code.)

Preventing Judgment Liens

Any creditor with an unsecured debt you owe can sue you if you do not pay the debt according to its terms. Most of the time such a lawsuit turns into a judgment against you on the debt. State laws determine how the creditor can then collect on the judgment against you. But usually the judgment either automatically becomes a lien against some of your assets or the creditor can take additional steps to create a lien, such as a lien against your home for the amount of the judgment.

As soon as there is a lien, a debt which could otherwise be discharged as an unsecured debt may have to be paid in full or in part in order to get a release of the judgment lien on your real estate or other assets.

Filing either a Chapter 7 or 13 case on a debt that has not yet turned into a judgment will prevent that from happening. Even if a lawsuit has been filed the judgment can be prevented if the bankruptcy is filed quickly enough.

If the debt is the kind that can be discharged in a Chapter 7 case—which includes most unsecured debts—then that will take care of the debt. At the end of the case the debt is discharged and then the creditor has no more debt to sue you for and create a judgment lien on your assets.

But what if the debt is one that is not discharged in the 3 or 4 months that a Chapter 7 case takes to process? If you are accused of having gotten the debt through fraud or misrepresentation there is a good chance the debt would not be discharged in a Chapter 7 case, for example. If the creditor takes appropriate action during the case the debt would not be discharged and the creditor can turn that debt into a judgment and put a lien on your assets.

In a Chapter 13 case you can make arrangements to pay such a fraud/misrepresentation based debt during the course of the 3-to-5-year payment plan. The “automatic stay” prevents the creditor from converting the unsecured debt into a secured one (as long as the creditor does not get extraordinary permission to the contrary from the bankruptcy judge).

Preventing Income Tax Liens

Income tax debts either meet the conditions for being dischargeable in bankruptcy or they don’t meet those conditions. These conditions mostly turn on whether enough time has passed since the tax return at issue was legally due and since the tax return was in fact submitted to the IRS or state tax agency. If the tax meets the conditions for discharge, the tax is simply discharged in a Chapter 7 case, essentially like any other dischargeable debt.

But if the IRS/state records a tax lien before you file a bankruptcy case that turns the unsecured tax into a secured one. Depending on what the tax lien attaches to, you may have to pay the tax in part or in full to get the tax lien released from your assets. So it’s very important to file bankruptcy—either Chapter 7 or 13—before the tax lien is recorded.

But what if the tax is one that does not meet the conditions for discharge? Filing a Chapter 7 case will stop the tax lien for only the 3-4 months that the “automatic stay” is in effect. The IRS/state can record a tax lien on such a tax as soon as your case is closed.

However, if you file a Chapter 13 case instead the IRS/state will be prevented from recording at tax lien throughout the 3-to-5-year period that a case usually lasts. During that period you would pay that tax, on your own schedule and at the same time that you deal with your other important debts. After paying off the tax, without the threat of a recorded tax lien, and completing the case, there would be no more tax debt on which a tax lien could be recorded.

 

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