I co-signed a loan and the primary borrower has filed for bankruptcy. What should I do to protect myself?

A co-signer is an individual who is promising to repay a loan in the event the primary borrower defaults. In many cases, having a co-signer on a loan may have been necessary to obtain the loan because the primary borrower’s credit rating was insufficient to qualify on their own, and the co-signer stepped in to assist the primary borrower to obtain financing without considering the long-term ramifications of that decision.

If the primary borrower defaults (or files bankruptcy), the co-signer will be required to pay the loan back. Additionally, unless the co-signer is also a “co-purchaser”, the co-signer is burdened only with the responsibility of repaying the debt and receives none of the benefit of the loan.

Consider the following example: Adam wants to buy a car, but can only qualify for a loan with a co-signer. Betsy agrees to co-sign, but her name is not listed on the title as an owner of the vehicle. Adam files for bankruptcy, and surrenders (gives back the car to the lender) and obtains a discharge of the car loan. Betsy is still legally obligated to repay the unpaid balance of the loan, but does not get title to the car when she finally finishes paying off the car – which now belongs to the bank.

Being a co-signer can be extremely risky, and if the primary borrower files for bankruptcy, your credit can be affected. However, you can manage the credit damage by doing the following:

1. Determine whether the primary borrower intends to reaffirm the debt in bankruptcy court, (i.e., keep the car and continue paying the loan), or will surrender it back to the lender.

2. If the primary borrower is going to reaffirm the vehicle, ensure that they keep the payments current through bankruptcy, and sign the reaffirmation agreement.

3. If the primary borrower is not intending to reaffirm, or has already lost the vehicle due to repossession, the only way to protect your credit is to repay the loan pursuant to the terms of the agreement

4. Be aware that many loans include an acceleration clause, meaning that if one of the borrowers files bankruptcy, the entire balance of the loan is due. If the lender exercises their right to accelerate the loan, the co-signer may not be able to make regular monthly payments.

Remember, the decision to co-sign a loan is often made out of a desire to help a friend or family member, but it comes with significant legal consequences if they fail to repay. Consider any request to co-sign a loan carefully, and if the primary borrower files for bankruptcy , it may be worth your while to reach out to a bankruptcy attorney to better understand your options and obligations regarding the loan.

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.

What does it mean if someone listed me in their bankruptcy as a Co-Debtor?

When a joint obligor on a promissory note or other debt files for bankruptcy, the bankruptcy code requires that notice of the bankruptcy case is provided to the creditor and all co-debtors who are also obligated to pay the debt. If you receive notice that a co-borrower or co-debtor on a particular debt has filed for bankruptcy, it means that the debtor is complying with this particular requirement of the statute. In order for any actual or contingent obligation to be dischargable in bankruptcy, the creditor (the individual or business which is owed money by the debtor) must receive notice of the bankruptcy case, and have the right to object to the discharge of the debt, if appropriate legal grounds exist to object.

The reason that the code requires that all co-borrowers receive notice is because whenever there is a joint debt, the individual co-borrowers have “contingent, unliquidated claims” against all the other borrowers. Put another way, if Danny and Alice borrow $5,000.00 jointly, and Danny doesn’t pay , the lender can sue Alice and force her to repay all of the $5,000.00. Alice can then sue Danny and force him to contribute to the payment of the judgment obtained against Alice. However, in the event Danny files for bankruptcy, neither the original lender, nor Alice can sue Danny in an attempt to collect the balance even if the lender seeks to collect against Alice.

In this case, Alice would be best served to speak to a bankruptcy attorney, because she has a very limited time to do what she can to protect her claim, if anything. Alice’s right to collect any money from Danny is very fact specific, and the whole story will determine whether Danny’s “contingent” debt to Alice can similarly be discharged. If you find yourself owing a joint debt with someone who has recently filed for bankruptcy , contact Attorney Matthew P. Trask to discuss your rights and obligations.

To read more about co-debtors and bankruptcy, see our post What happens to my Cosigner if I file for Bankruptcy.

How are Charitable Contributions treated in a Bankruptcy?

The Bankruptcy Court will evaluate any regular charitable contributions made by a debtor who is also seeking the protection of the bankruptcy court.  The code seeks to strike a balance between maximizing the amount of funds available to pay the creditor's debts, and also to enable the debtor to engage in reasonable charitable giving.  This means that the Court can reject this portion of a debtor's budget in certain circumstances.

Often this issue is raised in Chapter 13 cases where the debtor is claiming a regular expense paid directly to a religious institution (e.g. "tithing"), but can also arise in the context of other regular charitable giving.

The bankruptcy code makes clear that a court “is not supposed to engage in a separate analysis to determine whether charitable contributions up to fifteen percent are reasonably necessary for the debtor’s maintenance and support.” See Drummond v. Cavanagh (In re Cananagh), 250 B.R. 107, 112 (B.A.P. 9th Cir. 2000).  Despite the plain meaning of the statute, some courts have interpreted the code to subject charitable contributions to two limitations. First, that the amount of the contribution cannot exceed 15 percent of the debtor’s gross income, and, second, that the amount of the contribution itself is reasonable. See In re Buxton, 228 B.R. 606, 609 (Bankr. W.D. La. 1999).

The statute requires a three step test to determine if a charitable contribution may be excluded from a debtor’s disposable income and therefore available to pay creditors.

• First, the contribution must be a “charitable contribution” as defined by 11 U.S.C. § 548(d)(3). 
• Second, the contribution must be made to a “qualified religious or charitable entity or organization” as defined by 11 U.S.C. § 548(d)(4). 
• Third, the contributions must not exceed 15 percent of the debtor’s gross income for the year in which the contributions are made.

Therefore, provided a debtor's charitable contributions are to a qualified charitable entity and do not exceed fifteen percent of the debtor's income, such contributions are presumed reasonable. 

However, a New York bankruptcy court judge, Judge Robert E. Littlefield Jr., has made an exception to this test.  He has determined that in certain circumstances, a debtor's contributions may be determined to be unreasonable, particularly if the debtor's income falls under the IRS median income for the debtor's relevant jurisdiction. Judge Littlefield noted that according to the statute, if a person's income is less than the state's median income the IRS standards don't apply.  The reason for this distinction is because the allowance for reasonable charitable contributions is provided under the IRS standards; and because the IRS standards for income deductions only apply in cases where the debtor's income exceeds the IRS median family income.

So, if you regularly contribute to a charitable organization, and are considering bankruptcy, be sure to discuss those contributions with your bankruptcy attorney beforehand, in order to avoid objection by the bankruptcy trustee.

For more information about bankruptcy contact Attorney Trask or call 508.655.5980.

Also, if reading this post put you in a charitable mood we invite you to donate to the One-Mission Buzz-Off, which is a charity to benefit Children's Hospital Boston and the vital programs and services they provide to help kids beat cancer.  In support of this charity Attorney Kelsey will GO BALD on June 3, 2012 at their annual Buzz-Off.

Can a Guardian or Conservator File for Bankruptcy on Behalf of the Protected Person?

A guardian is responsible for managing the personal affairs of another individual such as living arrangements and health care. A guardian does not have authority to manage the assets of that individual, unless that individual does not have any assets aside from monthly income. If this individual has significant debts, it might be in the that individual's best financial interest to file for bankruptcy, and the guardian would be able to file for bankruptcy on their behalf.

If the protected person has assets, an appointed conservator would be the only individual with authority to file for bankruptcy on the protected person's behalf, as the one charged with managing the individual's property and business affairs. A conservator is bound by the standards of care under the Prudent Investor Act, and if this standard is met and bankruptcy is appropriate, a conservator would be able to file for bankruptcy on behalf of the protected person.

Be aware, however, if the protected person owes a debt to the guardian or conservator, there is a potential conflict of interest that could arise in the context of either a bankruptcy petition, or the probate and family court. Further, guardians and conservators are required to file annual reports with the probate and family court, and filing for bankruptcy on behalf of the protected person would likely be met with scrutiny by a judge.

All of this assumes, of course, that the protected person is eligible for bankruptcy. To see if you or someone you care about are eligible for a Chapter 7 bankruptcy, check out our Means Test Calculator.

Should you have questions about your options under the United States Bankruptcy Code, contact Attorney Matthew P. Trask for an initial consultation.

Should you have any questions about guardianship or conservatorship, contact Attorney Jonathan R. Eaton, or call 508.655.5980 to schedule an initial consultation.

Are my Firearms protected from my Creditors in a Bankruptcy case?

It’s no secret that Kelsey & Trask, P.C. is a Second Amendment friendly law firm. While most of our firearms practice is dedicated to licensing and firearms law compliance issues, firearms and Second Amendment issues come up in many of our other practice areas as well.

Firearms are often a good investment; they hold their value well, do not depreciate significantly, and for certain items, can appreciate significantly in value, particularly for Curio & Relic items and other historical firearms. Many firearms owners do not keep these items purely for their investment potential, but rather for personal protection or because their employment requirements requires them to keep and maintain a firearm.  In either instance, whether or not you can keep your firearms if you file for bankruptcy is an important question.

How are firearms treated in bankruptcy?

Like any other asset, firearms must be disclosed to the bankruptcy court and are subject to acquisition by the trustee if they are not exempt under the Federal or Massachusetts exemptions. There are a number of exemptions that may be used to establish the exemptability of firearms. Ultimately, the amount of the allowable exemptions may be affected by the debtor’s desire to exempt other personal property, but generally speaking, the following exemptions are available to protect a debtor’s firearms:

Federal Exemptions:

11 U.S.C. § 522(d)(5): $1,150.00, which is federal catch-all exemption and may be applied to any personal property owned by the debtor;

11 U.S.C. § 522(d)(5): Up to $10,825.00 of unused home equity not already exempted under 11 U.S.C. § 522(d)(1);

11 U.S.C. § 522(d)(6): $2,175.00 for tools and equipment used in business. For this exemption to be applicable to the debtor, the debtor must establish that the items are necessary for the debtor’s trade, employment or business.

Massachusetts Exemptions

A debtor filing for bankruptcy in Massachusetts may elect either the Federal exemptions or the Massachusetts exemptions. Massachusetts exemptions applicable to firearms ownership are as follows:

M.G.L. c. 235 § 34(10): The uniform of an officer or soldier in the militia and the arms and accoutrements required by law to be kept by the officer or soldier is fully exempt under the law. For this exemption to be applicable to the debtor, the debtor must establish that his status as an “officer or soldier” (e.g., a police officer, a National Guard member, or member of the U.S. Military) who, per the requirements of his or her duties, must personally purchase and maintain firearms for the performance of their duties.

M.G.L. c. 235 § 34(5): $5,000.00 for tools and equipment used in business. Like the federal exemptions, for this exemption to be applicable to the debtor, the debtor must establish that the items are necessary for the debtor’s trade, employment or business.

M.G.L. c. 235 § 34(17): Up to $6,000.00, representing the debtor’s aggregate interest in any personal property, not to exceed $1,000 in value, plus up to $5,000 of any unused dollar amount of the aggregate exemptions provided for the exemption of household furnishings, tools of the trade and a motor vehicle.

If you are facing bankruptcy and have personal and other property, such as a home and retirement accounts that you want to ensure is protected through the bankruptcy process, contact Attorney Matthew P. Trask to learn more about how to protect your assets and find your financial freedom.