How to avoid Objections to a Bankruptcy Petition.

A significant majority of Chapter 7 Bankruptcy filings are completed without any significant problems to the Debtor or objection by Creditors, provided the Debtor (and their counsel) properly and accurately discloses all necessary information required by the bankruptcy laws. However, the bankruptcy laws provide the grounds for creditors to object to the discharge of debts (meaning you will still owe the debt, even after filing bankruptcy) under certain circumstances.

If a creditor objects to the discharge of any of the debts listed in your petition or schedules, such objection must be raised within 60 days after the first scheduled §341(a) Meeting of Creditors. Alternatively, the trustee must move to dismiss your case within the 60-day period following the §341(a) Meeting of Creditors if he or she finds that the granting of relief would be an abuse of the provisions of Chapter 7.

So, what are traps to avoid objections to my petition?

Trap 1: New Debts Immediately Prior to Filing

If you incurred new debt of $500.00 or more for "luxury goods or services" within the 90-day period before your bankruptcy, or if you obtained a cash advance from a credit card or other loan in the amount of $750.00 or more within the 70-day period before your bankruptcy filing, that debt is presumed to be non-dischargeable, absent the debtor's showing to the contrary.

Trap 2: Debtor Dishonesty in Obtaining Debt

A creditor may object to your request to discharge a debt if the debt was obtained or incurred as a result of fraud, embezzlement or larceny, or any willful or malicious injuries you have caused others. If the Creditor establishes by a preponderance of the evidence that the debt was obtained by any of the above means, the debt will be deemed non-dischargeable.

Trap 3: Debtor Dishonesty in Filing for Bankruptcy

Creditors may object to the discharge of certain debts if you have concealed or destroyed any property or financial records; made any false statements in connection with incurring a debt or other financial obligation; withheld financial or other material information; failed to explain losses; failed to respond to material questions permitted under the Federal Rules of Bankruptcy Procedure; or if you were granted a discharge with respect to that debtor in a prior bankruptcy case filed within the last 6 years.

So, in conclusion, the best advice to consider if you are considering bankruptcy is to stop spending, or at least stop incurring new debt, and ensure you understand and completely disclose your financial history. As in the rest of life, honesty is the best policy.

Can a Mortgage Prevent you from Filing for Bankruptcy?

Individual bankruptcies, typically Chapter 7 or Chapter 13, are limited in certain ways.  For instance, Chapter 7 bankruptcy has income limitations, while Chapter 13 bankruptcy has debt limitations.   Below we will explain how your mortgage could disqualify you from filing Chapter 13 bankruptcy under the debt limitations.

A mortgage is a legal instrument typically securing a debt against real property, such as your residence. In our current real estate market, many homes are underwater. Not in the literal sense.  Figuratively, when a home is described as "underwater" it refers to the mortgages on said home having a value greater than the current fair market value of the home.

When filing a Chapter 13 bankruptcy, a wholly unsecured second mortgage or even the unsecured portion of an under-secured first mortgage should be listed as unsecured debt. Depending on other circumstances you may or not be able to discharge this "unsecured" debt, however that doesn't change the fact that the Court will consider it unsecured.

Why does this matter?

When filing a Chapter 13 bankruptcy, there are debt limits defined by 11 U.S.C. §§ 109(e). Said debt limits were recently raised, effective April 1, 2010. Under the current limits, a Chapter 13 bankruptcy will be dismissed if the debtor has unsecured debt greater than $336,900 and/or secured debt greater than $1,010,650. As of April 1, 2010, those figures rose to $360,475 and $1,081,400 respectively.

Consider the following scenario:
A debtor owns a $600,000 home but has $900,000 in mortgages. The debtor has a car with a lien of $20,000 (secured debt) and credit card (unsecured debt) of $100,000.

If the entire mortgage debt was considered secured then the debtor would be under the debt limits with a total secured debt of $920,000 and a total unsecured debt of $100,000. Unfortunately, because the Court considers the $300,000 of "underwater" mortgages unsecured, the debtor has a total unsecured debt of $400,000, which is above the debt limits. This debtor would, therefore, be ineligible to file for relief under Chapter 13 and be forced to seek other relief (possibly filing for bankruptcy under Chapter 7 or Chapter 11).

This is the exact scenario articulated by a California Court in an unpublished decision: In re Estrada.

Estrada refers to a Ninth Circuit decision: In re Scovis, 249 F.3d 975, 982 (9 th Cir. 2001). In Scovis, the Court stated that a "vast majority of courts, and all circuit courts that have considered the issue, have held that the unsecured portion of undersecured debt is counted as unsecured for 13 § 109(e) eligibility purposes."

It appears that this is also the law in Massachusetts. In re Marrama, 345 B.R. 458, 472 n.23 (Bkrtcy.D.Mass. 2006) In Marrama the court referenced Scovis and noted that the debtors failed to list the unseured portion of an undersecured mortgage as unsecured debt, which would have resulted in a greater unsecured debt.

Don't borrow from Peter to pay Paul, especially if you're planning to file for Bankruptcy!

Borrowing money leading up to a bankruptcy can cause multiple problems.

First, the debt for those funds could be non-dischargeable, meaning you will still owe it after the bankruptcy.  An example of how this could arise, was described in a previous post: Should I Pay My Student Loan with a Credit Card?  Debts such as student loans, certain judgments for personal injury resulting from gross negligence and or drunk driving and debts obtained by fraud cannot be discharged under the bankruptcy code.  If you borrow from another source, such as a credit card, to pay that loan then the new debt will be non-disagreeableness because the funds were obtained with the intention of filing bankruptcy and furthermore, the new loan can be treated the same as the original debt.

This means that even if the credit card company doesn't object to the discharge, they still might be able to pursue you after the discharge, just like a student loan company could (although best practice for the credit card company would be to object prior to the discharge).

Second, if you used these borrowed funds to pay another debt, those funds might be subject to taking by the bankruptcy court as a preference (a debt paid to the disadvantage of other creditors).  If that debt was a non-dischargeable debt, then you may still end up owing that debt after the bankruptcy, and the trustee could use those funds to pay other debts.

Third, and even worse, if the bankruptcy court found that you were attempting to commit a fraud upon the Court by moving this debt, the Court could deny your discharge altogether.

Finally, you could even be subject to criminal liability if the borrowing is determined to be a fraud, meaning you never intended to pay it back.  Fraud is a state crime and bankruptcy fraud is a federal crime.  

What is the difference between Chapter 7 and Chapter 13 bankruptcy?

Generally speaking, a Chapter 7 Bankruptcy involves a total liquidation of the debtor’s assets (although the debtor may keep certain allowable exempt assets), and any non-exempt assets are used to satisfy the debtor’s unpaid debts.  Any remaining dischargeable debts are discharged, meaning they are no longer owed.  A Chapter 7 case places no limits on the amount of debt that may be discharged; however, there are income qualifications in order to be eligible for Chapter 7 as a result of the 2005 changes to the Bankruptcy law.

A Chapter 13 case places no income restrictions on the debtor, so if you cannot file Chapter 7 because you do not pass the means test, you can likely file Chapter 13.  Chapter 13 begins much like a Chapter 7 case, but after the liquidation of non-exempt assets, if any, the debtor will pay a certain amount based on his available income and after deduction of living expenses to the U.S. Trustee, who will distribute payment to creditors on a pro-rata basis.  The debtor will make monthly payments for 3-5 years, depending on certain factors, and then, as long as the debtor makes payments every month, the remaining unpaid portion of most debts will be discharged (though some debts, such as student loans may still be owed even after completion of the plan).

Chapter 13 has the benefit of permitting the debtor to spread out the repayment of certain debts over a 3-5 year period that would be otherwise non-dischargeable, such as tax debt, or student loans.  Additionally, the debtor could use Chapter 13 to avoid foreclosure and pay back mortgage arrearages over the term of the plan, which is helpful in cases where the lender is demanding a high “cure” amount to voluntarily get a house out of foreclosure.

Bankruptcy & Litigation Series: #10 Criminal Cases

Over the course of our bankruptcy & litigation series we have explored many ways that a bankruptcy can affect the course or outcome of a civil case.  Criminal cases, however, are not typically affected by bankruptcy.

The Automatic Stay will not stay the imposition of a criminal sentence or criminal penalty.

Criminal penalties are non-dischargable to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss.

Additionally, debts arising out of frivolous claims filed by prisoners are not dischargable.

Bankruptcy & Litigation Series: #9 Personal Injury & Torts - Defendant Bankruptcy

Personal injury proceedings where the debtor is the defendant 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.

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

1 Debts for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;
2. for willful and malicious injury by the debtor to another entity or to the property of another entity;
3. for death or personal injury caused by the debtor’s operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance

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

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.

If you are a defendant and file for bankruptcy, the case will be stayed with respect to you while you are in bankruptcy, but may proceed against other named defendants.

Bankruptcy & Litigation Series: #8 Personal Injury & Torts - Plaintiff Bankruptcy

If you are the Plaintiff in a personal injury case and you file 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 of any receipts) will be turned over to the trustee as property of the bankruptcy estate and distributed to creditors.   Note that there are additional exemptions for personal injury cases in bankruptcy:  

1. $22,975 for personal injury damages, but not any recovery for pain and suffering or pecuniary loss

2. 100% of any award for loss of future earnings needed for support

3. 100% of any recovery for wrongful death of person you were a dependent of needed for support, and

4. 100% of any award of compensation received for being a crime victim.

5. Pain and suffering and pecuniary loss damages may be exempted under the wildcard exemption and/or unused home equity exemptions 11 U.S.C. 522 (d)(5). 

Therefore, if you are a personal injury plaintiff and file for bankruptcy during the pendency of your case or the possibility of bankruptcy is on the horizon at the conclusion of your case, it is important to work with your personal injury attorney to structure the settlement of your case in a way that maximizes the potential exemptions. 

Practice Tips:

1. If you are close to a personal injury settlement, make sure you consult with a bankruptcy attorney first.
2. Try to settle out the PI case before filing. A right to sue is an asset, and can be taken by the trustee if not exempt, and the trustee then decides how to settle the case.
3. Make sure your PI attorney considers how to structure your settlement in a way that protects as much of the judgment as possible: there are limits to the amount of personal injury damages that can be exempted ($21,625.00), but awards for future medical payments, lost earnings, disability payments, wrongful death and crime victims reparations are exempt 100%.