Bankruptcy & Litigation Series: #4 Collections - Defendant Bankruptcy

When one of the parties in a collection action goes bankrupt, the result is very different depending on whether it is the defendant or the plaintiff.  As described in this previous post, when the Plaintiff files for bankruptcy, the suit may continue but becomes an asset of the estate.  But what happens to a collection suit when the Defendant files for bankruptcy?

Collection proceedings against a debtor are automatically stayed pursuant to 11 U.S.C. s. 362.  The debtor or debtor's counsel should file a Suggestion of Bankruptcy in the civil suit, but NOT filing a suggestion of bankruptcy does not have any prejudicial effect.

The Plaintiff should file a proof of claim if the case is filed under Chapter 11 or Chapter 13, or in a Chapter 7 where there are assets to distribute. The underlying debt will be included in the debtor's discharge, and should the Plaintiff pursue the case, will be in contempt of either the Order of Discharge or the Order of Automatic Stay, and face civil contempt penalties, including being forced to compensate the debtor for actual damages, attorney's fees and punitive damages.

What if there are multiple defendants?

In cases where there are multiple defendants, the case will be stayed as to the debtor, but the case WILL proceed as to the remaining defendants.  See 11 U.S.C. s. 362

Note that depending on the case, certain damages claimed in a civil or personal injury suit are not dischargable:

1. Money, property or services or an extension of credit obtained by false pretenses or actual fraud; or by a false statement
2. Debts for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;
3. domestic support obligations
4. Debts for, what is essentially, bank fraud
5. for any payment of an order of restitution issued under title 18, United States Code
6. Election law penalties
7. Certain condo fees

See complete list at 11 U.S.C. s. 523.

Bankruptcy & Litigation Series: #3 Collections - Plaintiff Bankruptcy

A bankruptcy case can impact other litigation in many ways.  Some cases will be halted automatically by the filing of a bankruptcy due to the automatic stay.  Others might not be stopped, but might not be controlled by the bankruptcy trustee.  And some cases may not be affected at all.  Navigating these interactions can be difficult even for attorneys who are experts in other areas of the law if they don't practice in the bankruptcy court.

What happens to a Collection suit when the Plaintiff files for bankruptcy? 

It is generally a good idea to file a suggestion of bankruptcy to alert the court to the bankruptcy filing.  Most courts will temporary delay the hearing of the case, however 11 U.S.C. s. 362 is not designed for this application.  Ultimately, the suit itself is an asset of the bankruptcy estate.  Like any other asset, it may be exempt depending on the value of the potential claim.  In the event that it is not exempt (and at all times before being abandoned by the trustee), the Trustee steps into the plaintiff's shoes during the administration of the bankruptcy estate.

The Chapter 7 trustee may then offer to settle, or compel the debtor to pursue the suit (although the Trustee will bear the cost of compensating counsel for any post-petition legal fees).  Any proceeds obtained during the suit (less any exempt portions) will be turned over to the trustee as property of the bankruptcy estate and distributed to creditors.

Bankruptcy & Litigation Series: #1 Divorce

When a bankruptcy is filed, the automatic stay precludes creditors from proceeding in lawsuits against the debtor. If a bankruptcy is filed during a divorce case, the automatic stay applies to the divorce case as well.

The divorce Judge may proceed on issues of child support, alimony and custody of children, but may not make any decisions relating to the division of assets and debts without the permission of the bankruptcy court, and any decisions made by the divorce Judge are reviewable by the bankruptcy Judge.

Therefore, it is very important to consider the right timing of a bankruptcy and a divorce when a client will likely have to go through both process.

Filing Divorce First: Finishing the divorce action before beginning the bankruptcy filing allows the divorce action to proceed to its natural conclusion without interruption by the bankruptcy court. It is still possible, though, for the Bankruptcy Court to undo the Agreement or Judgment of the Divorce Court if it appears the parties were attempting to defraud creditors (for instance if all of the assets were transferred to the non-debtor spouse rather split equitably). Despite this risk, it is unlikely if the division is equitable that there would be any issue, and both cases would like proceed more smoothly one after the other, rather than simultaneously.

However, the debtor might be bound to make payments in the divorce case which could affect eligibility for bankruptcy, and might have made promises to divide property that is now an issue.  Domestic Relations Orders are non-dischargeable in most cases and therefore the decisions made in a divorce settlement, will have significant impact on what can and can't be discharged in the bankruptcy.  This is even further complicated by joint debts.  It's therefore important to have bankruptcy counsel review a potential divorce settlement prior even if the intention is to complete the divorce case first.

Filing Bankruptcy First: Likewise, there are certain circumstances where it might make more sense to file for bankruptcy prior to filing the divorce. For instance in a case where both spouses had significant debt, they can file as joint debtors so long as they are still married. Even if only one of the parties intended to file, there is a case which suggests that some of the protections for the debtor extend to the non-debtor spouse (protections that might not apply if the parties are already divorced).

The facts of each case will control whether it makes sense to file the bankruptcy or divorce first.  If you are assisting a client with a divorce case but don't have expertise in bankruptcy we recommend reviewing your strategy with an attorney trained in bankruptcy.  The terms of the proposed property settlement or transfers of property under the agreement may be hurtful to your bankruptcy case if your client plans on filing for bankruptcy shortly after the conclusion of the divorce matter. These issues are even more complicated when a Chapter 13 plan is in place, because a divorce can cause problems with making plan payments.  Having an attorney that can explain the bankruptcy consequences of the decisions made during the divorce will be critical in helping your client get a fresh start.

Bankruptcy & Other Litigation: A Ten Part Series

A bankruptcy case can impact other litigation in many ways.  Some cases will be halted automatically by the filing of a bankruptcy due to the automatic stay.  Others might not be stopped, but might not be controlled by the bankruptcy trustee.  And some cases may not be affected at all.  Navigating these interactions can be difficult even for attorneys who are experts in other areas of the law if they don't practice in the bankruptcy court.

The next ten posts will outline how bankruptcy cases can interact and may affect different types of litigation.  In the following posts we will cover how a bankruptcy case can affect or be affected by these types of cases:

#1: Divorce
#2: Post-Divorce
#3: Collections - Plaintiff Bankruptcy
#4: Collections - Defendant Bankruptcy
#5: Evictions - Landlord Bankruptcy
#6: Evictions - Tenant Bankruptcy
#7: Foreclosures
#8: Personal Injury & Torts - Plaintiff Bankruptcy
#9: Personal Injury & Torts - Defendant Bankruptcy
#10: Criminal Cases

What to do when you receive a Notice of Bankruptcy? Step 3: Identify Deadlines.

If you receive a Notice of Bankruptcy, it will contain certain deadlines and meeting dates.  The sample below shows where some of those deadlines will appear:

These dates are important because they limit what you can and cannot do in a case, and if you miss any of these deadlines you may have given up your rights to make certain objections or claims.  You should read the Notice carefully to make sure you understand all of the information contained therein.  To highlight some of these limits we have indicated them with red arrows in the sample Notice above.

Some of the important dates and limitations that appear on the Notice are as follows, in descending order as they appear on the Notice:

The date of filing:  This is the date that the debtors case was filed with the court and some of the other dates will depend on this date.

The meeting of creditors:  This is the date that the Section 341 Meeting of Creditors is first scheduled to take place.  The Creditor's Meeting is scheduled about 30 to 45 days after the bankruptcy petition is filed. At least seven days before this meeting, the debtor is required to provide to the trustee and any creditor requesting it a copy of their most recently filed tax returns and proof of income for the most recent 90-day period. The court-appointed Chapter 7 trustee will preside over this meeting. At the meeting, which the debtor is required to attend, the debtor will be asked to testify under oath as to the accuracy of the statements in the petition. Creditors have a right to attend this meeting and ask questions, though they are not required to.

Deadline to object to discharge or to challenge the dischargeability of certain debts:  
A creditor may object to the discharge of amounts owed to them by the debtor under certain circumstances. If a creditor objects to the discharge of any of the debts listed in the petition or schedules, such objection must be raised within 60 days after the first scheduled §341(a) Meeting of Creditors.  If you do not raise such an objection in a timely manner you risk waiving that right and having any such debt discharged.

Deadline to object to exemptions:  Certain property claimed by the debtor to be exempt (not reachable by creditors), may be claimed as exempt in error.  If that is the case, then that property might be used to pay creditors.  Once the §341(a) Meeting is concluded, creditors only have 30 days to object to these exemptions after which the trustee may (and likely will) release all of this exempted property back to the debtor.

Deadline for financial management course:  The debtor must take a financial management course within 60 days after the first scheduled §341(a) Meeting of Creditors, and if they don't they might not receive their discharge.

Automatic Stay: Immediately upon the filing date, an automatic stay prevents creditors from taking certain actions against the debtor.  If you violate the automatic stay you may be subject to sanctions and fines by the bankruptcy court.  You should ensure that you do not take any action against the debtor after the filing date without consulting with a bankruptcy attorney to ensure that you are not violating the automatic stay.

There may be other deadlines in cases that are different from the Chapter 7 no asset case in our example.  For example, in a case with assets there will also be a deadline for filing a Proof of Claim.    To ensure that you know all of the deadlines and meeting dates read your Notice carefully.

Once you understand what your deadlines are, the next step is to identify: What is your exposure to liability if the debtor receives their discharge?

I’m suing someone and they filed for bankruptcy. What happens next?

As we have discussed in previous posts, immediately upon filing a voluntary Petition for Bankruptcy, the protections of the Automatic Stay go into effect to protect the debtor in an active bankruptcy. 11 U.S.C. §362(a) provides that the commencement or continuation of any acts or proceedings against the debtor in an effort to collect or recover any debt is automatically stayed, and any further efforts at collection are prohibited and punishable by law. Pursuant to 11 U.S.C. §362(k), an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.

Therefore, if you are the plaintiff in a civil lawsuit against a debtor in bankruptcy, it is imperative that you immediately cease collection efforts against the debtor, including ensuring the court takes no further action with respect to the case. Debtor’s counsel should file a “Suggestion of Bankruptcy” with the court, which is a notice to the Court that a party to the case is in bankruptcy, and the case may not proceed with respect to them or any claims against them. If the Debtor’s counsel does not file a suggestion of bankruptcy, in order to avoid the penalties of 11 U.S.C. §362(k), you or your attorney should ensure the court is aware that a party to the case has filed for bankruptcy. The Court Clerk or your civil attorney will advise you on the proper way to file such a notice.

Once the case has been stayed (i.e., paused), you must decide if you have grounds to pursue your claims in bankruptcy court, or have a reason why the particular debt is nondischargable by law in bankruptcy. For example, debts which were obtained by false pretenses, or false representations, or actual fraud are not dischargeable, nor are debts owed for fraud or defalcation while acting in a fiduciary capacity, or embezzlement or larceny, among other things. Each of these categories have particular legal requirements in order to prove nondischargability, and in order to prevent the discharge of that debt, you will need to prepare and file an Adversary Proceeding in the Bankruptcy Court.

Procedurally, an Adversary Proceeding is conducted much like a lawsuit in District Court or Superior Court, although the Bankruptcy Court maintains jurisdiction over the resolution of the claims. Removing a case to bankruptcy court can have far-reaching consequences on other aspects of the litigation, and we strongly recommend you consult with an attorney before doing so.

In some situations where your debt is secured or enjoys a legal priority over other debts, and there are assets available in the bankruptcy to pay creditors, it may not be necessary to file an adversarial proceeding, but rather a Proof of Claim. A Proof of Claim is your notice to the court establishing the existence of a debt and the nature of the debt, and will be reviewed by the Trustee and the debtor’s counsel. If funds are available to satisfy your class of debt, you may receive payment (partial or full, depending on the assets obtained from the debtor) from the bankruptcy trustee on behalf of the debtor’s bankruptcy estate.

Regardless, if you are involved in litigation and the opposing party files for bankruptcy, contact Attorney Matthew P. Trask to discuss how the bankruptcy will affect your case and claims moving forward. To fail to assert your rights in the bankruptcy case so could be an extremely costly mistake.

I’m being sued. Can a bankruptcy help?

If you are being sued on a debt collection matter, or other civil matter for which a money judgment can be imposed, filing bankruptcy may give you relief from your creditors. The Automatic Stay halts all existing court proceedings that the debtor is involved in, as well as any collection efforts for the individual's debts, until the bankruptcy proceedings are resolved.

In certain situations, the Automatic Stay might not prevent other court proceedings from continuing, at least in part. For example, in any family law case involving child support and custody, issues involving visitation or current child support are not subject to the Automatic Stay, but issues involving past due child support will be continued until the Automatic Stay is lifted at the end of bankruptcy proceedings.

The Automatic Stay is designed to provide some breathing room for the debtor in bankruptcy and provide the time and logistical ability to reorganize debts (as in a Chapter 11 or Chapter 13), or obtain a discharge (as in a Chapter 7 case). While the long-term resolution of a lawsuit will depend on the type of case, the Automatic Stay will provide some immediate protection for the debtor.

Ultimately, the debtor’s primary concern will be whether the debt or obligation on which the lawsuit is based will be discharged in bankruptcy. Absent fraud or certain other factors, most lawsuits arising out of consumer debts (e.g., lawsuits on unpaid credit cards or mortgage deficiencies following a foreclosure) are dischargeable under Chapter 7, and can be discharged following the successful completion of a Chapter 13 plan. However, the following debts arising under some suits cannot be discharged:

1. Lawsuits for unpaid taxes, custom duties, or debts to pay taxes or custom duties.
2. Lawsuits collecting student loan debt.
3. Lawsuits to collect unpaid spousal or child support.
4. Lawsuits filed by a spouse, former spouse, or child to enforce a Court Order obtained in a domestic relations proceeding.
5. Lawsuits where the debt was included in a previous bankruptcy wherein discharge of that particular debt was waived, such as reaffirmed debts.
6. Lawsuits for debts owed for money, property, services, or refinancing of credit, if obtained by false pretenses, or false representations, or actual fraud.
7. Lawsuits involving consumer debts for luxury goods obtained within ninety (90) days of the date of filing of the bankruptcy petition.
8. Lawsuits involving cash advances obtained within seventy (70) days of the date of the filing of the bankruptcy petition.
9. Lawsuits involving debts owed for fraud or defalcation while acting in a fiduciary capacity, or embezzlement or larceny.
10. Debts owed for fines, penalties, or forfeitures payable to and for the benefit of governmental entity.
11. Lawsuits and debts owed for death or personal injury arising from the operation of a motor vehicle, boat, or aircraft while intoxicated by drugs or alcohol.

It is important to understand that the filing of a case will temporarily stop the lawsuit for many of the above claims, even though the actual debt is nondischargable. However, once the protections of the Automatic Stay expire, or the opposing party obtains permission from the Bankruptcy Court to move ahead, the case may proceed, and you may be required to pay any debt arising out of the above types of lawsuits, even after bankruptcy.

The Interplay of the Automatic Stay, Child Support, and Alimony

One of the most significant benefits of filing for bankruptcy is the Automatic Stay. In short, the Automatic Stay halts other existing court proceedings that the individual filing for bankruptcy is involved in, as well as any collection efforts for the individual's debts, until the bankruptcy proceedings are resolved.

In certain situations, the Automatic Stay might not prevent other court proceedings from continuing, at least in part. For example, in any family law case involving child support and custody, issues involving visitation or current child support are not subject to the Automatic Stay, but issues involving past due child support will be continued until the Automatic Stay is lifted at the end of bankruptcy proceedings. It is possible that a judge in this instance will actually not hear any issues at all until the Automatic Stay is lifted, but the circumstances might be such that the issues of visitation or current support need to be addressed in a more timely manner.

It is important to understand that although the Automatic Stay will halt court proceedings, any existing order for current child support or alimony will still accrue. In other words, an individual that is obligated to pay child support or alimony each week will not be relieved of this after a filing for bankruptcy, whether the person filing for bankruptcy is the individual who is supposed to pay the alimony or child support, or the individual who is to receive the alimony or child support. The Automatic Stay should, however, suspend efforts to collect any arrearage.

Additionally, for individuals that file for bankruptcy who are to receive alimony or child support payments and are owed an arrearage, any past due child support or alimony obligations and any current child support or alimony obligations are exempt from the bankruptcy proceedings, meaning that a bankruptcy trustee may not use this support to pay other creditors.

Should you have any questions about family law matters or bankruptcy, contact Attorney Jonathan R. Eaton by calling 508.655.5980 to schedule a one hour initial consultation.

4 Facts Your Divorce Attorney Should know about Bankruptcy? Fact #1: The Automatic Stay

Immediately after a Bankruptcy Petition is filed, the court enters an Automatic Stay Order prohibiting the creditors from taking or continuing any collection or legal action against the debtor. The automatic stay is a useful tool in temporarily stopping foreclosure proceedings brought by mortgage holder(s), as well as collection efforts, collection calls and lawsuits filed by creditors.

The Automatic Stay also puts an immediate stop to some portions of a pending divorce, modification, or contempt proceedings. Specifically any actions relating to debts or the division of assets cannot be ruled on by the Divorce Court while the bankruptcy is pending, unless the Bankruptcy Court is first asked for permission by filing a Motion for Relief from the Automatic Stay. Even issues relating to the collection of child support or alimony may be stayed or considered under the jurisdiction of the Bankruptcy Court while a petition is pending.

The penalties for violating the Automatic Stay can be significant, including fines and attorneys fees and it is therefore very important to seek Relief from the Automatic Stay before attempting to move forward with any issues that may be in the jurisdiction of the bankruptcy court. In order to avoid costly mistakes for divorce clients, we encourage divorce practitioners to consult with bankruptcy counsel when there is the potential that one party in the divorce will file for bankruptcy.

Of course, issues relating to custody are not affected by the Automatic Stay and can continue, though this may require a bifurcation of the probate matter.

Click here to read the other 3 Facts:
Fact #4: Jurisdiction over your Assets
Fact #3: Jurisdiction over your Debts
Fact #2: Domestic Support Obligations.

What Will Happen to My Car if I File for Bankruptcy?

When filing for Bankruptcy under Chapter 7 and Chapter 13, certain property of the debtor is exempt from the Bankruptcy estate, which means simply that the debtor can keep that property (and the trustee and creditors can't take it).

When filing a Bankruptcy as a resident of Massachusetts a debtor can choose to use the exemptions allowed under either State or Federal law, but you must choose one or the other. There are many exemptions that are similar under both schemes and many that are different.

As of April 14, 2009, the allowable exemption for motor vehicles was $3,225 under the Federal Exemptions and $700 under the Massachusetts Exemptions. This means that if you choose the Federal Exemptions you can keep your car so long as it has less than $3,225 in equity (value of the car minus balance of the loan).

In addition to the value of the motor vehicle exemptions, the Federal Exemptions also allow for some "wild-card" exemptions: $1,075 generally and $10,125 of unused homestead exemption. If you have few other assets besides your car you may be able to use these "wild-card" exemptions to exempt further equity in your car if it has equity over $3,225.

If your car is subject to a loan you will have to reaffirm said loan or the car will be surrendered to the lender or trustee for sale. For more information about available exemptions click here.

UPDATE: The Massachusetts Exemptions have recently changed. For more information read our post on the changes: New Massachusetts Property Exemptions: The Return of 2 Cows, 12 Sheep and 2 Swine.

Terms in Loan Modifications that Waive Automatic Stay Protection Void

On March 2, 2010, the Massachusetts Bankruptcy Court issued "Emergency Standing Order 10-2" addressing certain provisions of Loan Modification and Forbearance Agreements.

Emergency Standing Order 10-2 effectively voids any provision of any loan modification or forbearance agreement which states that upon default of the lender, the benefits of the automatic stay are waived. Prior to Emergency Standing Order 10-2, if a modification included such a waiver, the bank or mortgage lender could proceed with a foreclosure or other collection actions despite the filing of a Chapter 7 or Chapter 13 bankruptcy. Any individual considering a loan modification should be very careful when considering the terms offered by the lender in any loan modification. Nevertheless, Emergency Standing Order 10-2 effectively extends the protection of 11 U.S.C. s. 362(a) to cases where lenders have attempted to circumvent automatic stay protections through prior modifications, forbearance agreements or other loan workouts by voiding any provision in any agreement which attempts to waive automatic stay protection.

The full text of the order is available here.