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Archive for the ‘no-asset Chapter 7 case’ tag

Creditor Not Listed But Knows about Your Case

April 8th, 2019 at 7:00 am

Usually if you don’t list a debt, it doesn’t get discharged.  An exception is if the creditor still learns about your case, on time. 

 

Last week’s blog post was about the importance of listing all debts in a bankruptcy case to write them off. Debts “neither listed nor scheduled” in the bankruptcy documents are not discharged (legally written off). Section 523(a)(3) of the Bankruptcy Code.

Special Scenarios

This rule raises a number of practical questions. Here are some common situations:

  1. You don’t list a debt but the creditor finds out about your bankruptcy some other way.
  2. Your debt has been sold or assigned to a collection agency without your knowledge
  3. You don’t have good records of your debts and you may not know some of their names and addresses.

Today we address the first of these.

Creditor Knows About Your Bankruptcy Case

If you don’t list a debt it’s still covered by your bankruptcy case if that creditor knows about the case. The Bankruptcy Code says a debt is not discharged “unless such creditor had notice or actual knowledge of the case.”  Section 523(a)(3)(A) and (B)

This doesn’t mean that you can avoid listing a creditor on your debt schedules because you know it will find out about your case some other way.

First, what if the creditor doesn’t actually find out or claims that it didn’t? You could end up owing the debt. It’s much safer to list the debt in your bankruptcy documents.

Second, you are required to list all your debts. Bankruptcy is not just about you and that one creditor.  If you want the benefits of bankruptcy you must play by the rules, which include listing all your debts.

If you have any reason for not wanting to list a debt, talk with your bankruptcy lawyer. There is usually a workable solution to your concerns.

Must Know about Your Case “In Time”

There’s an important condition to this “notice or actual knowledge” exception. Your creditor needs to learn about your case in time to participate in it.

So what’s the deadline for your creditor to learn about your case if you don’t list its debt?

There are 3 possible different deadlines for 3 different kinds of cases.

1. Proof of Claim Deadline

First, some bankruptcy cases give creditors the opportunity to file a “proof of claim.” That’s a document a creditor files at bankruptcy court documenting what it believes you owe. In Chapter 13 “adjustment of debts” cases creditors file proofs of claim to receive any money through your payment plan. In “straight bankruptcy” Chapter 7 “asset” cases creditors file proofs of claim to possibly share in the liquidation of any non-exempt (unprotected) assets. In these cases the bankruptcy court mails out a formal notice giving a strict deadline to file proofs of claim. 

In these cases your unlisted creditor must learn about your case in time to be able to file a proof of claim. Section 523(a)(3)(A).

2.  Creditor Objection Deadline

Second, sometimes a creditor has grounds to object to the discharge of its debt on the basis of your fraud or similar bad action in the incurring of the debt. This can happen in either a Chapter 7 or Chapter 13 case.  In all cases the bankruptcy court mails creditors a notice of the strict deadline to file an objection. 

In these cases your creditor must learn about your case in time to be able to file such an objection. Section 523(a)(3)(B).

3. Possibly No Deadline

Third, in other bankruptcy cases neither of the two situations above applies. In fact that covers most Chapter 7 cases. Most have no assets to distribute because everything the debtor owns is exempt, or protected. The case is a “no asset” case. With nothing to distribute, the court does not ask creditors to file proofs of claim. So there’s no deadline to do so. Also, most creditors have no grounds based on fraud or similar bad actions to object to the discharge of its debt. So any deadline to file such an objection doesn’t apply. So what’s the deadline for an unlisted creditor to learn about your case so that its debt is discharged?

In some parts of the country there is essentially no deadline in these kinds of cases. If you find out at any time about a debt you didn’t list in a “no asset” Chapter 7 case, you or your lawyer may be able to simply inform the creditor and the debt is covered in your case. The debt is then included in the discharge of debts that you received in your case. That may be true even if your case is already completed.

But because the statute does not directly address this situation, your local court may interpret it differently. You might still owe the debt because you didn’t give the creditor notice about your bankruptcy. Again, talk with your bankruptcy lawyer as soon as you learn about a debt that you forgot to include for advice about your specific options.

 

“Property of the Estate” Includes an Inheritance

May 31st, 2017 at 7:00 am

If you are expecting an inheritance, or even if you are not, the special rules about them are worth your attention to prevent bad surprises. 


Most people thinking about filing bankruptcy aren’t expecting an inheritance.

But if you are, there are some very important timing rules that can affect whether and when you’ll file bankruptcy.

And even if you are not expecting an inheritance, these rules are helpful to know in case you unexpectedly do receive one.

Fixation on Property Owned at the Moment of Filing Bankruptcy

When we introduced “property of the estate” a week ago we emphasized that it’s comprised of everything you own at the “commencement of the case.”

The timing is crucial. Usually any property you acquire in the days and months after filing a Chapter 7 case is not “property of the estate.” It doesn’t fall within the jurisdiction of the bankruptcy court or the reach of the liquidating Chapter 7 trustee. You don’t have to protect that property with exemptions. It’s simply yours.

This feature is an important part of the “fresh financial start” that Chapter 7 bankruptcy provides. After that moment in time when you file your case you’re generally free to earn and acquire income and assets. They are beyond the reach of your creditors.

Inheritances are an exception to this.

The 180-Days-after-Filing Inheritance Rule

If within 180 days after you file bankruptcy you “acquire or become entitled to acquire” an inheritance, then the property being inherited is counted as if it was your property at the time you filed.  (See Section 541(a)(5)(A) of the Bankruptcy Code.)

In other words, whatever you inherit within that 180 days becomes “property of your Chapter 7 estate.” To whatever extent the inherited property isn’t exempt or protected some other way, the Chapter 7 trustee can take and liquidate it to pay your creditors.

Includes Interests in Property Acquired by “Bequest, Devise, or Inheritance”

The term “inheritance” specifically means property received through state laws distributing the property of a decedent who did not leave a will. The 180-day rule covers this.

But it also covers property acquired through a will. A “bequest” and a “devise” are provisions in a will giving away the personal property and real estate, respectively. These are also covered by the 180-day rule.

Ignorance is No Defense

It does not matter that you did not expect to receive anything through someone’s death. It doesn’t matter that you don’t even know that the person leaving you something has died. Any such property is yours for bankruptcy purposes regardless of your lack of knowledge about them.

Conclusion

So before filing bankruptcy, think about who you might possibly inherit from. Consider the likelihood that the person could die within the following six months. Talk with your bankruptcy lawyer about it. There may be some favorable ways of dealing with this situation that would protect some or all of that inheritance for you, if you inform your lawyer in advance.

 

“Property of the Estate” in Chapter 7 Bankruptcy

May 24th, 2017 at 7:00 am

To find out if you can keep everything you own in a Chapter 7 case, the first step is finding out what’s in your bankruptcy estate.

 

In most consumer Chapter 7 bankruptcy cases, the person filing the case (the debtor”) gets to keep everything they own. But getting to that point is a process. The first step in that process is understanding “property of the estate.” (The later step is to determine whether all of the property of your estate is protected, or “exempt.”)

An “Estate” in Bankruptcy

We normally think of an estate as the property owned by a person at the time he or she dies. But more broadly it’s “all the property and money that belongs to someone.” In bankruptcy it has an even broader meaning, including a number of categories of property.

When you file a Chapter 7 case, doing so automatically creates an estate. That estate includes a different categories of property. Today we’ll focus on what for most people is the main category. In most simple cases it is the only category of property involved in your Chapter 7 case.

“All Legal and Equitable Interests of the Debtor”

This first category iincludes “all legal or equitable interests of the debtor in property as of the commencement of the case.” This essentially means everything you own at the moment you file your case. See Section 541(a)(1) of the U.S. Bankruptcy Code.

Property “Wherever Located and by Whomever Held”

Whether or not you have possession of something, or where it happens to be located, do not matter. See Section 541(a) of the Bankruptcy Code.

If it’s legally yours, then even if it’s not in your possession when you file your Chapter 7 case, it becomes property of the estate.

If it is not legally yours although it’s in your possession, it does not become property of your Chapter 7 estate.

Here are a couple examples. If you borrow your sister’s rifle for a hunting trip and just haven’t returned it at the point you file your case, that’s NOT part of the property of the estate. However, if your dad gifts you his rifle, which you keep in his gun safe away from your kids, that rifle IS property of the estate.

At “the Commencement of the Case”

Timing is crucial and precise.

The “commencement of a case… creates an estate. Such estate is comprised of…  all… interests of the debtor in property as of the commencement of the case.” 

This means that the property of the estate excludes something you owned the day before filing but no longer do. It means that the property of the estate excludes something you didn’t own until the day after filing.

For example, if, on the day before filing bankruptcy, you spend $1,000 on food and a vehicle repair, that $1,000 is not property of your bankruptcy estate. Or if, on the day after you file, a relative gives you $500 to buy school clothes for your kids, that $500 is not property of your estate.  

Important Timing Exceptions to the “Commencement of a Case”

There are exceptions. Property of the estate can sometimes include certain possessions and money you owned before filing bankruptcy. It can also include possessions and money you got after filing. We’ll get into these in our next few blog posts.

 

The Chapter 7 Trustee Looking into an Asset

May 10th, 2017 at 7:00 am

What happens when something you own is not or may not be exempt (protected)? What does the trustee do about this and what is the end result?

 

Chapter 7 is the “liquidation” form of bankruptcy. But in our last blog post we introduced the bankruptcy trustee as an only sometimes liquidator. That’s because in most Chapter 7 cases nothing gets liquidated. Nothing gets taken from you and sold to pay your creditors. And that’s because most of the time everything you have is “exempt,” protected.

But what happens when you own something that is not covered by your allowed property exemptions?

One of two things will happen. The trustee looks into it and decides your asset is not worth liquidating after all. Or he or she may decide it is worth liquidating. We cover the first situation today, the second one in an upcoming blog post.

Three Scenarios

Your trustee may get interested in an asset of yours under these three scenarios:

  • You disclose on your asset and exemption schedules that you own an asset not covered by an exemption.
  • The trustee believes you may have undervalued an asset.
  • The trustee disputes that an exemption you claimed applies to your asset.

We get into the first of these scenarios today.

Disclosed as Not Exempt

When filing a bankruptcy case you list your assets, or property, on Schedule A/B. Then on Schedule C you list the “Property You Claim as Exempt.”

Again, often you show that everything on Schedule A/B is completely exempt on Schedule C. But let’s say there’s something that’s shown not to be exempt. Let’s say you own a second vehicle, and your first vehicle’s value exhausts the amount of vehicle exemption available in your state. So in this scenario your second vehicle is not exempt.

So the trustee sees that and wants to check out this non-exempt asset, to see if it worth liquidating. Assume you’ve valued it at $1,000 based on the fact that it’s old, needs brakes and maybe some transmission work.

The trustee may or may not decide it’s worth taking this vehicle from you to sell and pay its proceeds to your creditors.  The trustee has a lot of discretion of deciding this.

So in this scenario he or she may ask to have you take it to a particular vehicle repair shop for an independent assessment about the seriousness of the required repairs, and the likely saleable value of the vehicle. Let’s say the repair shop verifies that your vehicle needs new brakes and has a definite transmission problem. The trustee finds out that in light of this your $1,000 valuation was fair, or maybe even a little generous.

Factors in the Trustee’s Decision

You may think that for sure the trustee will take the vehicle. After all, getting $1,000 to your creditors is better than them getting nothing, right?

But the creditors wouldn’t likely get anywhere close to $1,000, even if the vehicle sells for that much. The trustee knows that there are liquidation costs that would offset any sale proceeds. These likely include towing and storage fees, and auction or advertising costs. Plus the trustee gets paid a fee—usually about 25% of the first $5,000 collected. (See Section 326 of the U.S. Bankruptcy Code.)

The trustee will likely look at the number, amount, and the nature of the debts. If there are a lot of debts adding up to a relatively large amount, so that a very small percentage of the debts would get paid out of the vehicle sale proceeds, the trustee would be less inclined to take and sell the vehicle.

If you owe a “priority debt”—such as recent income taxes, the trustee may be less inclined as well. That’s because that tax debt gets paid before anything goes to the other debts. So if the tax debt is more than the amount available to pay out to all the creditors, all the money would go to the tax debt. No other debts would be paid. Since this kind of tax debt survives Chapter 7 bankruptcy, you would have to pay it anyway. So there’s very little practical benefit to the trustee paying part of it by selling your second vehicle.

The Relatively Detailed Distribution Procedure

Finally, there’s a fair amount of effort for the trustee involved in the distributing of funds to creditors. All creditors are given an opportunity to file “proofs of claim.”  The trustee has to review each of them to see if they are valid, objecting to those that appear not to be or that need more documentation. Then the trustee may prepare and the court sends out a notice about the proposed sale of the vehicle. Creditors and other interested parties could object to it. Then there’s a notice about the proposed distribution of the funds to creditors, which could also be objected to. Same thing with the trustee’s proposed fee (although some of these notices may be consolidated into one).

This is a lot of paperwork, over the course of several months, all of which takes effort by the trustee. Most trustees are not going to go through all that for a couple hundred dollars.

“Insufficient Assets for a Meaningful Distribution”

So, there is a good chance that in this situation the trustee would decline to take that second vehicle. He or she would formally report that there are “insufficient assets for a meaningful distribution to the creditors.” The trustee would declare the case to be a “no-asset” Chapter 7 case—there are no assets worth liquidating and distributing.

 

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