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What is Bankruptcy?

Written by on August 30, 2011 · Leave a Comment

With this website, I attempt to answer your questions about Chapter 7 and Chapter 13 bankruptcy and I briefly discuss Chapter 11.  I think the best way to begin is by looking at the basic framework of a bankruptcy case.

Filing Your Petition – “Commencing the Case”

A bankruptcy case officially begins when you file your petition.  Unofficially it begins when you start collecting documents and completing schedules and worksheets necessary to prepare your petition.

The day you file your petition is the “petition date.”  The petition date is used to calculate various deadlines the must be met to work your way through the bankruptcy process.

Stopping creditor calls with the Automatic Stay

The petition date is also important because, from the moment you file your petition, all your creditors are required by law to stop calling you, sending you mail or otherwise harassing you.  This is called the “automatic stay” and it’s like a temporary injunction.

On the petition date, all of your non-exempt property is transferred to a bankruptcy estate, which is loosely similar to the estate that formed when someone dies.  The bankruptcy estate is administered by a trustee appointed by the court.  I’ll discuss exempt and non-exempt property later.  The important concept to remember is that no long have exclusive control over property in your estate.

For example, you need to seek trustee approval and court permission to sell a car or short-sell a house

The ultimate goal of bankruptcy is to receive a discharge.

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Bankruptcy Section 727: Chapter 7 Bankruptcy Discharge

Written by on September 26, 2011 · Leave a Comment

Analysis of Bankruptcy Section 727.

Discharge is the heart of the fresh start provisions of the bankruptcy law. Section 727 requires the court to grant a debtor a discharge unless one of nine conditions is met.

The first subsection (subsection(a)) requires the court to deny a debtor a discharge if one of nine conditions is met.

The first condition is that the debtor is not an individual. “Individual” includes a deceased individual, so that if the debtor dies during the bankruptcy case, he will nevertheless be released from his debts, and his estate will not be liable for them. Creditors are entitled to only one satisfaction–from the bankruptcy estate and not from the probate estate.

The next three grounds for denial of discharge center on the debtor’s wrongdoing in or in connection with the bankruptcy case.

If the debtor, with intent to hinder, delay, or defraud his creditors or an officer of the estate, has transferred, removed,destroyed, mutilated, or concealed, or has permitted any such action with respect to, property of the debtor within the year preceding the case, or property of the estate after the commencement of the case, then the debtor is denied discharge.

The debtor is also denied discharge if he has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any books and records from which his financial condition might be ascertained, unless the act or failure to act was justified under all the circumstances of the case.

The fourth reason for denying discharge is the commission of a bankruptcy crime, although the standard of proof is preponderance of the evidence rather than proof beyond a reasonable doubt. These crimes include the making of a false oath or account, the use or presentation of a false claim, the giving or receiving of money for acting or forbearing to act, and the withholding from an officer ofthe estate entitled to possession of books and records relating to the debtor’s financial affairs.

The fifth reason for denying discharge is the failure of the debtor to explain satisfactorily any loss of assets or deficiency of assets to meet the debtor’s liabilities.

The sixth reason is refusal to testify. It is a change from present law, under which the debtor may be denied discharge for legitimately exercising his right against self-incrimination. Under this provision, the debtor may be denied discharge if he refuses to obey any lawful order of the court, or if he refuses to testify after having been granted immunity or after improperly invoking the constitutional privilege against self-incrimination.

The seventh ground for denial of discharge is the commission of an act specified in grounds two through six during the year before the debtor’s case in connection with another bankruptcy case concerning an insider.

The eighth reason for denying discharge is derived from Sec. 14c(5) of the Bankruptcy Act [section 32(c)(5) of former title 11].If the debtor has been granted a discharge in a case commenced within 6years preceding the present bankruptcy case, he is denied discharge.This provision, which is no change from current law with respect to straight bankruptcy, is the 6-year bar to discharge.

A Chapter 11  will bar a discharge for 6 years. As under current law,confirmation of a composition wage earner plan under chapter 13 is a basis for invoking the 6-year bar.The ninth ground is approval by the court of a waiver of discharge.

Subsection (b) specifies that the discharge granted under this section discharges the debtor from all debts that arose before the date of the order for relief. It is irrelevant whether or not a proof of claim was filed with respect to the debt, and whether or not the claim based on the debt was allowed.

Subsection (c) permits the trustee, or a creditor, to object to discharge. It also permits the court, on request of a party in interest,to order the trustee to examine the acts and conduct of the debtor to determine whether a ground for denial of discharge exists.

Subsection (d) requires the court to revoke a discharge already granted in certain circumstances. If the debtor obtained the discharge through fraud, if he acquired and concealed property of the estate, or if he refused to obey a court order or to testify, the discharge is to be revoked.

Subsection (e) permits the trustee or a creditor to request  revocation of a discharge within 1 year after the discharge is granted,on the grounds of fraud, and within one year of discharge or the date of the closing of the case, whichever is later, on other grounds.

Bankruptcy Code Section  727

(a) The court shall grant the debtor a discharge, unless–

(1) the debtor is not an individual

(2) the debtor, with intent to hinder, delay, or defraud acreditor or an officer of the estate charged with custody ofproperty under this title, has transferred, removed, destroyed,mutilated, or concealed, or has permitted to be transferred,removed, destroyed, mutilated, or concealed–

  • (A) property of the debtor, within one year before the date of the filing of the petition; or
  • (B) property of the estate, after the date of the filing of the petition;

(3) the debtor has concealed, destroyed, mutilated, falsified,
or failed to keep or preserve any recorded information, including
books, documents, records, and papers, from which the debtor’s
financial condition or business transactions might be ascertained,
unless such act or failure to act was justified under all of the
circumstances of the case;
(4) the debtor knowingly and fraudulently, in or in connection
with the case–

  • (A) made a false oath or account;
  • (B) presented or used a false claim;
  • (C) gave, offered, received, or attempted to obtain money,
  • property, or advantage, or a promise of money, property, or
  • advantage, for acting or forbearing to act; or
  • (D) withheld from an officer of the estate entitled to
  • possession under this title, any recorded information, including
  • books, documents, records, and papers, relating to the debtor’s
  • property or financial affairs;

(5) the debtor has failed to explain satisfactorily, before
determination of denial of discharge under this paragraph, any loss
of assets or deficiency of assets to meet the debtor’s liabilities;

(6) the debtor has refused, in the case–

  • (A) to obey any lawful order of the court, other than an
  • order to respond to a material question or to testify;
  • (B) on the ground of privilege against self-incrimination,
  • to respond to a material question approved by the court or to
  • testify, after the debtor has been granted immunity with respect
  • to the matter concerning which such privilege was invoked; or
  • (C) on a ground other than the properly invoked privilege
  • against self-incrimination, to respond to a material question
  • approved by the court or to testify;

(7) the debtor has committed any act specified in paragraph (2), (3), (4), (5), or (6) of this subsection, on or within one year before the date of the filing of the petition, or during the case, in connection with another case, under this title or under the Bankruptcy Act, concerning an insider;

(8) the debtor has been granted a discharge under this section, under section 1141 of this title, or under section 14, 371, or 476 of the Bankruptcy Act, in a case commenced within 8 years before the date of the filing of the petition;

(9) the debtor has been granted a discharge under section 1228 or 1328 of this title, or under section 660 or 661 of the Bankruptcy Act, in a case commenced within six years before the date of the filing of the petition, unless payments under the plan in such case totaled at least–

  • (A) 100 percent of the allowed unsecured claims in suchcase; or
  • (B)(i) 70 percent of such claims; and (ii) the plan was proposed by the debtor in good faith, andwas the debtor’s best effort;

(10) the court approves a written waiver of discharge executedby the debtor after the order for relief under this chapter;

(11) after filing the petition, the debtor failed to complete aninstructional course concerning personal financial managementdescribed in section 111, except that this paragraph shall not applywith respect to a debtor who is a person described in section109(h)(4) or who resides in a district for which the United Statestrustee (or the bankruptcy administrator, if any) determines thatthe approved instructional courses are not adequate to service theadditional individuals who would otherwise be required to completesuch instructional courses under this section (The United Statestrustee (or the bankruptcy administrator, if any) who makes adetermination described in this paragraph shall review such determination not later than 1 year after the date of such determination, and not less frequently than annually thereafter.); or

(12) the court after notice and a hearing held not more than 10days before the date of the entry of the order granting the
discharge finds that there is reasonable cause to believe that–

  • (A) section 522(q)(1) may be applicable to the debtor; and
  • (B) there is pending any proceeding in which the debtor maybe found guilty of a felony of the kind described in section 522(q)(1)(A) or liable for a debt of the kind described insection 522(q)(1)(B).

(b) Except as provided in section 523 of this title, a dischargeunder subsection (a) of this section discharges the debtor from all debts that arose before the date of the order for relief under thischapter, and any liability on a claim that is determined under section 502 of this title as if such claim had arisen before the commencement of the case, whether or not a proof of claim based on any such debt or liability is filed under section 501 of this title, and whether or not a claim based on any such debt or liability is allowed under section 502
of this title.

(c)(1) The trustee, a creditor, or the United States trustee may object to the granting of a discharge under subsection (a) of this section.
(2) On request of a party in interest, the court may order the trustee to examine the acts and conduct of the debtor to determine whether a ground exists for denial of discharge.

(d) On request of the trustee, a creditor, or the United States trustee, and after notice and a hearing, the court shall revoke a discharge granted under subsection (a) of this section if–

  • (1) such discharge was obtained through the fraud of the debtor, and the requesting party did not know of such fraud until after the granting of such discharge;
  • (2) the debtor acquired property that is property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the
  • acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee;

(3) the debtor committed an act specified in subsection (a)(6) of this section; or
(4) the debtor has failed to explain satisfactorily–

  • (A) a material misstatement in an audit referred to in
  • section 586(f) of title 28; or
  • (B) a failure to make available for inspection all necessary accounts, papers, documents, financial records, files, and all other papers, things, or property belonging to the debtor that are requested for an audit referred to in section 586(f) of title 28.

(e) The trustee, a creditor, or the United States trustee may
request a revocation of a discharge–

  • (1) under subsection (d)(1) of this section within one year
  • after such discharge is granted; or
  • (2) under subsection (d)(2) or (d)(3) of this section before the
  • later of–

(A) one year after the granting of such discharge; and
(B) the date the case is closed.

 

 

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Does filing bankruptcy stop my divorce proceeding?

Written by on September 14, 2011 · Leave a Comment

Does filing bankruptcy stop my divorce proceeding?

Bankruptcy and Divorce

Bankruptcy and Divorce Don't Mic

Although bankruptcy stays (stops) court actions against a debtor (a debtor is simply a term for someone who has filed bankruptcy), it doesn’t affect the following family law proceedings:

  • Child custody and visitation
  • Marital status
  • Restraining orders
  • Determination of paternity
  • Litigation over Support

The bankruptcy code states clearly that filing for divorce or dissolution is not stayed by filing a  petitions. However, it makes equally clear that the divorce court does not have the authority to divide the marital property while a bankruptcy is in progress.

Advantage of filing  before filing Divorce

Filing for bankruptcy before filing for divorce has advantages. Bankruptcy eliminates or minimizes many jointly-held debts. Those debts don’t have to be divided between the parties during the divorce—they’re gone. Eliminating debt also frees up more money for child or spousal support.

Dividing Debt and Property

Suppose you’ve already obtained a divorce and have a court-approved martial settlement agreement that obligates you to assume certain debts or transfer assets to your spouse. Filing a Chapter 7 will not wipe out those obligations. However, they are dischargeable if you file Chapter 13.

All community property is subjection to a bankruptcy proceeding, with very limited exceptions. (See USC Section 541).  A marital settlement agreement obtained before filing a petition that awards property to a non-filing spouse is enforceable.  The state court judgment eliminates the debtor’s interest in the property.  Because that property is no longer owned by the debtor when the petition is filed, it is not included in the estate.

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Automatically Nondischargeable Debts in Bankruptcy

Written by on September 13, 2011 · Leave a Comment
Bankruptcy Discharge
Sample Bankruptcy Discharge

Debts that Can’t be Discharged if a creditor objects to discharge

Some of your debts are nondischargeable only if someone objects to their discharge. Nondischargeable means you will still owe a debt after you have received a discharge and your bankruptcy case is over. Debts for which a creditor must object to discharge include debts obtained by fraud.  These will discussed in more detail in future blogs.

Debts that Can’t be Discharge whether a Creditor Objects or Not

Other debts are automatically nondischargeable, whether any creditor objects to the discharge or not. Those debts include:

  • Student loans, unless there is “undue hardship.”
  •  Homeowner association fees that become due and payable after the bankruptcy petition is filed and for as long as you, the debtor, have a “legal, equitable or possessory interest in the property.
  •  Money owed to a pension or retirement plan.
  •  Child or spousal support obligations.
  • Claims that should have been listed in a prior bankruptcy, but weren’t, and claims that were denied discharge in a prior bankruptcy case.
  • Debts not listed in the bankruptcy schedules unless the creditor somehow had actual knowledge of the bankruptcy. Most large creditors automatically keep up with bankruptcy filings. Small, local, creditors probably won’t know about your bankruptcy unless they receive notice from the bankruptcy court.
  • Certain federal and state taxes. Taxes can be discharged, in general, if they are more than three years old, the tax return for the taxable income was filed more than two years ago, and the taxes were “assessed” more than 240 days ago.  Taxes undertaken to pay off taxes aren’t dischargable also.  For instance, the IRS accepts credit cards for the payment of your taxes.  If you pay your taxes using a card, you can’t later wipe out that portion of your credit card debt.
  • Debts the bankruptcy court has decided you can’t discharge.
  • Debts that you have agreed to keep paying on (reaffirmed).

The information above is an overview of nondischargeable debts and, of course, there are exclusions and exceptions to the rule for most of the debts I’ve discussed.  Each of these debt categories will be discussed in more detail in future blogs. You may wish to subscribe to my newsletter to receive new blogs automatically.

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The “Meeting of Creditors” (341 hearing) is Not a Court Appearance

Written by on September 9, 2011 · Leave a Comment

If you’re a typical debtor, the only time you’ll discuss your case with anyone other than your attorney is at the “Meeting of Creditors.” Referred to as a 341 hearing by attorneys, this meeting is an opportunity for the bankruptcy trustee assigned to your case (and possibly creditors) to ask questions about your petition.

The trustee is an attorney, not a judge, appointed by the U.S. Trustee (which is a branch of the Department of Justice.) It is not necessary to address the trustee as “your honor.”

Creditors are permitted to question you about specific assets and liabilities. Unless you are suspected of hiding assets, it is unlikely that large corporate creditors like American Express will send a representative to quiz you. Usually, no creditors appear.

The only creditors I typically see at a 341 hearing are people who’ve made personal loans to the debtor. For instance, if you borrow money from an acquaintance to buy a house, he/she may show up to see if there’s anything they can do to save their loan. Unfortunately, the 341 hearing is the wrong forum to seek such advice because neither the debtor’s attorney nor the trustee can help you.

Before the hearing, you should carefully review your petition. The trustee may ask you if you make, say, $4,560 month. He/she is taking this information directly from your petition–which you completed with your attorney and signed. Some debtors assume they’ve been asked a trick question and hesitate before answering, or say “I’m not sure.” The hearing will go easier if you can confidently answer the trustee’s questions, based on your earlier review.

It amazes me when a debtor “remembers” something when questioned by the trustee that they “forgot” to tell their attorney. This causes extra work for your lawyer, not to mention some professional embarrassment. If, for instance, you have a boyfriend who contributes to your support every month, disclose this to your attorney and list it on your petition instead of revealing it for the first time to the trustee at the 341 hearing.

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Health Club Memberships and other “Executory Contracts”

Written by on September 8, 2011 · Leave a Comment

When you file a bankruptcy petition, you may be paying on a club membership or other executor contract. A gym membership may have seemed a great idea in January, but can be harder to get out of than losing weight. Fortunately, bankruptcy provides a way to get out of (reject) ongoing contract.

photo by Mike Westerdal of CriticalBench.com

An executory contract is simply one where two parties still have obligations they need to perform (execute). Examples include, car and property leases, installment payment contracts for furniture, water delivery service contracts, networking marketing contracts and cell phone service agreements.

An executory contract does not include agreements for the purchase of an item. You can get out a motor vehicle lease. However, if the “lease” provides that you own the vehicle at the end of the lease term it is a finance agreement, not an executory contract.

An agreement to purchase a vacuum cleaner which you entered into from a door-to-door salesman is probably a secured finance agreement which you can’t reject. (However, you can offer to surrender the vacuum cleaner. The company then needs to come by and pick up the cleaner—which is rarely done.)

In many cases, you may not want to reject an executory contract. If you can afford to, you’d probably like to keep your cell phone. On the bankruptcy petition, indicate you wish to affirm the agreement, and it’ll continue. The Chapter 7 trustee has the power to reject the agreement, even if you want to keep the cell phone—but typically won’t reject an essential contract.

 

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What does the Chapter 13 Trustee do?

Written by on September 7, 2011 · Leave a Comment

After you’ve filed a Chapter 13 petition, the Chapter 13 trustee reviews all the filed schedules and other documents to make sure they comply with the Bankruptcy Code.

Supervision by the Chapter 13 Trustee

Unlike a Chapter 7 case, you have much more interaction with the Chapter 13 trustee.  All plan payments are made directly to the trustee and most of your future income is subject to the trustee’s supervision.

Plan payments are sent to the trustee be either a cashier’s check or money order. You can also elect to have your monthly payment deducted from your paychecks.  From this amount, the trustee pays all creditors who have submitted proofs of claim.  Claims are paid in order of priority, with certain claims such as for administration of your plan, being paid first.

Once or twice a year, the trustee will send you a report of all money received and paid out.  You can also find this information on the trustee’s website—you need to log in with your social security number and case number.

Trustee Objections to filed Plan

The trustee almost always makes objections to filed petitions, so don’t be surprised to receive formal “objections to plan” in your mailbox.  Many are routine and are handled by your attorney.

If you want to incur new debt or sell or refinance property after your plan has been filed, the Chapter 13 trustee will be involved.  Your attorney files a motion with the court, with notice to the trustee.  The trustee advises the court about  the status of your case and can file an objection to a proposed transaction.

Because the trustee has extensive experience, the court usually respects the trustee’s opinion on your case.

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Advantages of Chapter 13 Bankruptcy

Written by on September 6, 2011 · Leave a Comment

You’ll want to file a Chapter 13 bankruptcy rather than a Chapter 7 when you have property, or equity in property, that you want to save. (Equity is the difference between what something is worth and what you owe on it.)

Read “What is Chapter 13?” and “Chapter 7 in Brief” for a rundown on the differences between Chapter 13 and Chapter 7.

The primary advantages of Chapter 13 are:

  • You can keep can house from foreclosure.
  • Automobiles and household goods can be saved from repossession.
  • The balance due on some consumer debts and the interest rate can be reduced through a “cram down.”
  • You can file for a Chapter 13 just four years after received a discharge in in a Chapter 7 case.  You have to wait eight years to file a second Chapter 7.
  • A Chapter 13 is easier and cheaper than a Chapter 11.
  • You can pay nondischargeable taxes over the life of the plan (usually 3 or 5 years) with no additional interest or penalties.
  • Credit reporting agencies report a Chapter 7 case for 10 years but report a Chapter 13 case for only 7 years.
  • Creditors may be view you in a better light if you complete a Chapter 13 because you made an effort to repay at least a portion of your debts.
  • People who co-signed on a debt with you, such as your parents, also benefit from the automatic stay and can’t be pursued by creditors.

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Eligibility for Chapter 7

Written by on September 5, 2011 · Leave a Comment

Not everyone one, or every business, is eligible to file a Chapter 7 bankruptcy. Individuals don’t qualify if they reside outside the United States (not domiciled), or they don’t have a business or property in the United States.

The bankruptcy code doesn’t care about your level of financial problems. You don’t have to be insolvent or have a certain amount of debts to file Chapter 7.

Before you can file for Chapter 7 you must have received counseling sometime during the 180-day period prior to filing. This requirement can be waived for a period under certain limited circumstances. The courts are strict about enforcing the counseling requirement and it’s more trouble than it’s worth in many cases to try for an extension. In one case, a Chapter 13 case was dismissed for failure to complete credit counseling when the petition was filed on an emergency basis to avoid a foreclosure sale.

Having a pending bankruptcy case at the same time a Chapter 7 petition is filed doesn’t affect the new petition. The court can simply consolidate the two cases.

If you have received a discharge in a prior case, it doesn’t affect your eligibility to file a new case. However, it can affect your ability to receive a discharge in your new case.

Even if you meet the eligibility requirements, your case can be dismissed if it is filed in bad faith, i.e. the filing is an abuse of the bankruptcy system. Dismissal for abuse of the bankruptcy system is primarily applicable to filers with “primarily consumer debts.” However, abusing the bankruptcy system can cause substantial problems beyond dismissal—e.g. in some case, criminal charges.

 

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Documents Needed to Prepare a Bankruptcy Petition

Written by on September 4, 2011 · Leave a Comment

Before your first meeting with an attorney, or before you start preparing a petition yourself, you should start gathering together the following documents:

  • A list of all debts.
    I ask my clients to bring in all the bills they’ve received over the prior  few months.  Although I order a
    credit report, I find it helpful to compare the bills received by my clientagainst their report.
  • Copies of at least the last two income tax returns (both federal and state.)  You are required to
    file your tax returns in order to file bankruptcy.  For a Chapter 13, you need to be able to show you have filed your last four returns. You also need to show your attorney any notices or letters from the IRS or state taxing agency.
  • Pay stubs for the last seven months.
  • Copies of any garnishments, repossession documents and lawsuits.
  • Copies of any foreclosure notices, including Notice of Default and Notice of Sale.
  • Profit and loss statements for any business operated.  If you own a business that
    carries an inventory you need to prepare an inventory report.

This is a minimum list of documents.  Generally, as I go through a client’s documents more questions arise that, in turn, require additional documentation.

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Need for Bankruptcy if facing immediate threats

Written by on September 3, 2011 · Leave a Comment

When you call a lawyer’s office for a bankruptcy appointment, be sure to let the support staff answering the phone know whether you are facing an immediate financial threat.  Most potential clients who call my office are calling to obtain general information such as determining whether bankruptcy is the right solution for their financial problems.  But occasionally, I get an emergency call–I call it the 911 call.

Garnishment and Repossession

A financial emergency is one that poses an immediate threat to your way of life.  For example, you get your paycheck and discover that  a creditor has begun garnishing your wages.  Another immediate threat is the repossession of your car.

Being served with a lawsuit, isn’t really a financial emergency because a creditor can’t take immediate action against you.  Filing a lawsuit is the first step in a long process that concludes with the execution of a judgment.  A judgment is executed by garnishment, reposession, etc.

Foreclosure Sale of Home

The biggest threat, of course, is a foreclosure sale of your home.  Some potential clients call when an auction is set for later in the week.  Ideally, a homeowner who receives a notice of default should consult with a lawyer as soon as they receive that notice.  If they receive a notice of sale, they definitely need to be on the phone right away.

Bankruptcy can stop a foreclosure auction, even if the petition is filed the day of the auction.  However, filing at the last minute creates a lot of stress for both you and your attorney.  Your attorney can file what’s known as a “skeletal” or “bare bones” petition which  I’ll discuss in detail in another post.

Once filed the auction is called off.  The lender can’t auction your house after the petition is filed without filing a motion in bankruptcy court, or waiting until after you receive a discharge.

Most financial emergencies are preventable by consulting a bankruptcy attorney when you first sense trouble brewing.  I know most potential clients are cash-strapped and don’t want to add an attorney’s bill to their pile of problems.  However, most bankruptcy attorney’s offer a free initial consultation and may be able to provide guidance during that first visit.

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