“How many people are in your household,” is one of the first questions you will be asked when speaking with an attorney about filing bankruptcy.

Household Size is an important issue in a bankruptcy.   It could determine whether you are eligible to file Chapter 7 or it could determine the monthly payments of your Chapter 13 Plan.

Sometimes determining household size is easy and sometimes it is much more complex.  If you are a married couple with no children, you are a household of size two.   If you are single and have two minor children that reside in the household, then you are a household of size three.  What if you are single but share custody of your two minor children?   What if you are married and your adult daughter lives in the house with her two minor children?   What if your sister and her boyfriend are residing with you?  It quickly becomes easy to see why determining household size can be difficult.

According to In re Robinson, 449 BR 473 (Bankr.E.D.Va, 2011), there are three main ways to calculate household size.  First, you can take a very broad approach and state that all persons in the household count towards the household size (aka: the “heads on beds” approach).  Second, you can take a very narrow approach and view household size as a reflection of an individual’s tax return, where household size is limited to a spouse and the dependents listed on the tax return.  Third, you can view the household as an economic unit and include all persons who factor in the economic unit.  This is the approach utilized by the Nebraska Bankruptcy Court in a recent opinion regarding the question of household size.

The economic unit approach to household size provides a workable solution to those real-life situations when members of the household may be sporadically living in the household or when persons connected to our economic livelihood are without official familial titles.  The household size becomes a calculation of those persons who factor into the overall economic unit of your home.  In order to get the most appropriate household calculation, you can expect your attorney to follow-up the first question above with many more questions about the individuals in your household and their economic impact on you.

If you are thinking about filing bankruptcy and have any questions regarding how your household size may impact you, or any other questions, feel free to give us a call at (402) 718-8865 or click here to send me an email. Burke Smith Law is an Omaha law firm focusing on bankruptcy and other consumer issues. We offer an initial free consultation to help you determine what’s in your best interest.

The Bankruptcy petition requires debtors to disclose all assets.  One important asset to be disclosed is an anticipated tax refund.

Many debtors have concerns about whether a Chapter 7 Trustee can take their tax refund.  The answer is a qualified yes. The Chapter 7 Trustee is limited in the taking of tax refunds for a couple of reasons.

First, debtors are allowed exemptions regarding their personal property.  Exemptions are state or federal allocations of personal property that are off-limits for collection by any creditor and are exempt in bankruptcy from turnover to the Chapter 7 Trustee.  The amount of exemption available for protection of a tax refund varies from state-to-state.

Second, the portion of tax refund based on the Earned Income Credit is not subject to turnover to the Chapter 7 Trustee because this credit has an exempt status designated by Congress.  Therefore, tax refunds are not always surrendered to the Chapter 7 Trustee.

If you are contemplating filing bankruptcy and spending your tax refund before filing bankruptcy, you should talk with an attorney.  Spending a tax refund for regular household purchases is generally not an issue.  However, there are many ways to spend your refund that will result in problems during your bankruptcy, such as paying creditors or purchasing non-exempt assets, such as high-end electronics.

Make sure to talk with your attorney regarding the use of any asset prior to filing bankruptcy to be sure you are adhering to the Bankruptcy Code and that all pre-filing actions are properly disclosed in your petition.

The best course of action is to review your case with an experienced bankruptcy attorney if you anticipate a tax refund.  It is important to know what will happen with your tax refund during your bankruptcy and to be sure that all assets are properly disclosed on your petition.  If you have questions regarding this, please feel free to email me by clicking here or calling me at (402) 718-8865.

The headline says it all: Costly Debt Settlement Schemes Prey on the Most Debt-Burdened Consumers Struggling to Recover From Economic Downturn.

The Better Business Bureau, the New York City Department of Consumer Affairs, the U.S. Government Accountability Office (GAO), the Federal Trade Commission (FTC) as well as 41 state attorneys general have all uncovered substantial evidence of abuses by a wide range of debt settlement companies.

The problem is that the vast majority of debt settlement companies require that you stop making payments on your current debts and therefore default on them. The idea is that you start making payments to the debt settlement company, and they will negotiate a settlement with your creditor. The problem is that when you default on your loan, the creditor very quickly adds penalties and interest to your debt, which increases the amount you owe very quickly.

Not only that, but the creditor also starts to aggressively collect on the debt, often calling debtors at home or at work, as well as filing suit against them in court. The debt settlement company in the vast majority of cases are not able to negotiate a settlement and as a result the debtor is left with more debt, a worse credit score and possible lawsuits filed against them.

Most debt settlement companies also require hefty fees to be paid up front and on an ongoing basis. When the debtor terminates the program, the debt settlement company almost always keeps all the payments made to it as “fees”. Any way you look at it, it is a bad outcome for the consumer.

The National Association of Consumer Bankruptcy Attorneys has released a consumer alert as well as a news release which includes additional information:

It is recommended that consumers steer clear of any companies that

• Make promises that unsecured debts can be paid off for pennies on the dollar.
• Require substantial monthly service fees and demand payment of a percentage of what they’ve supposedly saved you.
• Tell you to stop making payments or to stop communicating with your creditors.
• Suggest that there is only a small likelihood that you will be sued by creditors.
• In fact, this is a likely outcome.  Signing up with a debt settlement company makes it more likely that creditors will accelerate collection efforts against you.  Creditors have the right to sue you to recover the money you owe. In Nebraska, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home.
• State that they can remove accurate negative information from your credit report.
• No company or person can remove negative information from your credit report that is accurate and timely.

As Ed Boltz, NACBA Board member and incoming NACBA president said: “Many different kinds of services claim to help people with debt problems.  The truth is that no single solution works in all cases.  Bankruptcy is an option that makes sense for some consumers, but it’s not for everyone.  For example, the National Association of Consumer Bankruptcy Attorneys and its individual consumer bankruptcy attorney members do not encourage every person who looks at bankruptcy to enter into it.   What makes sense for each consumer will depend on their individual circumstances.  We encourage everyone to get the facts and do what makes the most sense in their situation.”

If you have questions about your debt situation or you’re dealing with an aggressive debt collector, please give me a call at (402) 718-8865 or email me by clicking here. I am an Omaha attorney who counsels people regarding their financial situations and can help you determine whether bankruptcy makes sense or not.

The number of lawsuits being filed by debt buyers against people nationally and in Nebraska has been rising steadily over the years. Along with the rise in lawsuits filed has been a huge increase in the profits made by these debt buyers, profits that you don’t have to contribute to.

In most cases, a debt buyer who files suit against someone, has no evidence to support their claim, and if they do have some evidence, it is usually not persuasive or difficult or impossible to introduce into court. Why then are the vast majority of lawsuits filed by debt buyers won by them? How do they reap their huge profits? By counting on the fact that the person sued won’t fight back. By not answering the Complaint filed against you, you are guaranteeing that the debt buyer will win and will be able to go on to collect money against you, perhaps even garnishing your wages.

How do you fight back against this? The answer is simple, file an Answer to the Complaint and demand that the debt buyer prove his case. By demanding that the debt buyer prove that you (1) had an account with a credit card company or other credit provider, (2) that you became delinquent on the account and owe the creditor money, (3) the account was purchased and the debt properly transferred to the debt buyer and (4) demanding that all of this evidence follow the rules of evidence to be properly admitted into court.

While the majority of cases filed by debt buyers would be simple for an attorney to dismiss or beat, it can be challenging for a non-lawyer to use the legal rules and procedures to their advantage. However, if properly motivated (for instance by having a questionable lawsuit filed against you for a large amount of money), many non-lawyers would be able to successfully fight a lawsuit against them.

If you have been sued in Nebraska by a debt buyer and would like to discuss the possible successful defense of your case, give me a call at (402) 718-8865 or contact me be clicking here. I am an Omaha, Douglas County Nebraska attorney who specializes in consumer advocacy, bankruptcy and FDCPA claims.

If Chapter 7 strengthens your hand against your secured creditors, Chapter 13 turns you into Superman.  It starts with a much more robust “automatic stay.”

The last blog explained how filing a Chapter 7 “straight bankruptcy” will 1) temporarily or permanently prevent your secured creditors from taking your collateral; 2) help you keep the collateral; and 3) if you want, enable you to surrender the collateral to the creditor without causing you financial harm.  In each of these areas, the Chapter 13 “payment plan” gives you many more powers to achieve your goals. Because there are so many Chapter 13 powers, these three areas will be covered in the next few blogs.

Stopping Creditors from Taking the Collateral

The “automatic stay,” which immediately stops your secured creditors from taking any action against the collateral under Chapter 7, gives you that same benefit under Chapter 13. (See Section 362 of the Bankruptcy Code.) But the “automatic stay” can be tremendously stronger in Chapter 13 for three reasons:

1. Lasts So Much Longer: Chapter 7’s “automatic stay” generally lasts only about 3 months, and sometimes not even that long if a creditor asks the court for “relief from stay” to get permission to go after the collateral. At best, Chapter 7 only pauses the action against you and the collateral. In contrast, a Chapter 13 case itself lasts usually 3 to 5 years, and the protection of the “automatic stay” is in effect that entire time, again unless a creditor is successful in getting “relief from stay.”

Whether or not a creditor asks for “relief from stay” in the first place can largely depend on how we treat that creditor in your Chapter 13 Plan, and then on how well you fulfill the terms of that Plan as to that creditor. But even if the Plan is reasonable and you are making payments on it appropriately, the creditor may file a motion asking for “relief from stay” just to try to force some concessions from you. The creditor may want larger monthly payments to pay off a debt faster, or to have the advantage of a court-ordered trigger mechanism encouraging you to make the payments on time. This kind of gamesmanship can somewhat narrow the protections you get from the “automatic stay.” But it does not change the main fact that in a Chapter 13 case your collateral is usually protected for much longer, giving you a lot more flexibility in how you handle your secured debts.

2. The “Co-Debtor Stay”: A Chapter 7 case does not stop a creditor from pursuing any co-signer you may have or that co-signer’s collateral. Chapter 13 does. (See Section 1301.) There are limitations to this special kind of “stay,” so how much practical help it provides to you depends on the facts of each case. But at the very least the co-debtor stay immediately protects the co-signer, giving you a chance to get your Chapter 13 plan started and to see whether and/or how the creditor reacts.

As with the usual “automatic stay,” an affected creditor can ask for “relief from the co-debtor stay” to get permission to go after the co-signer or its collateral. Unless and until this motion is filed and the bankruptcy court decides to give this permission, your co-signer is protected. Once the motion is filed you may need to pay this creditor more to prevent it from being allowed to go after your co-signer.  But sometimes you may be able to pay more to this creditor simply by paying less to your other creditors, not necessarily more out of your own pocket. Again, it depends on all the facts of your case, and also on the flexibility of your assigned Chapter 13 trustee and bankruptcy judge. The key point is that the “co-debtor stay” gives you the power to protect your co-signers immediately, and potentially forever, whereas Chapter 7 would provide no help at all.

3. Enables the Other Chapter 13 Powers to Work: Chapter 13 gives you many strong powers for dealing with secured creditors, many of which only work because of the long and continuous protection provided by the “automatic stay.” For example, unlike Chapter 7 which provides no mechanism for catching up on unpaid mortgage payments (other than whatever payment schedule the creditor voluntarily agrees to), Chapter 13 effectively gives you the entire length of the 3-to-5-year case to catch up. But this only works because throughout this time the mortgage holder is stopped from foreclosing by the ongoing “automatic stay.”

Another example illustrates well the crucial role of the “automatic stay” in Chapter 13. Most mortgage documents require the homeowner to pay the home’s property taxes either directly to the taxing authority or more often through an escrow account set up for that purpose. If the taxes are not paid by the homeowner, that is a separate violation of the mortgage agreement and separate grounds for the creditor to start a foreclosure against the homeowner. When the homeowner files a Chapter 13 case, this stops BOTH the mortgage creditor’s foreclosure AND any present or upcoming tax foreclosure by the county (or applicable taxing authority). The homeowner’s Chapter 13 plan shows how the back payments to both the creditor and the taxing authority will be paid. The protection given to the homeowner by the “automatic stay” against the taxing authority also protects the mortgage creditor by preventing the tax foreclosure of its collateral. This effectively takes from the creditor that justification for taking the home away from the homeowner. The continuous “automatic stay” is the critical element which makes this all work.

Your secured debts are often the ones you most care about, because the creditor can take your collateral. Chapter 7 strengthens your hand, improving your options.

Secured Debts

A secured debt is usually one in which your agreement to pay a debt is backed up with some collateral. If you don’t pay, the creditor can take possession and ownership of that collateral.  So, a mortgage holder can foreclose on your home, a vehicle lender can repossess your vehicle, and the appliance store can haul away your washer and dryer.

But for the creditor to have rights to your collateral—for the debt to be truly “secured”—the creditor needs first to have gone through the appropriate legal steps to tie the collateral to the debt. Some debts that look like secured debts turn out to be unsecured. In the above example of the washer and dryer, whether or not the creditor can repossess your appliances depends on whether it followed the law to tie them to the debt.

Besides secured debts in which you voluntarily gave the creditor rights to the collateral, there are many kinds of secured debts in which the creditor got those rights by operation of law. This happens without your consent, sometimes even without your knowledge, often as part of the debt collection process. An example is an IRS tax lien recorded against your real estate and/or personal property for non-payment of income taxes.

Power Provided by Chapter 7

A Chapter 7 case can help with both voluntary and involuntary secured debts. It will 1) temporarily or permanently prevent your creditor from taking your collateral; 2) help you keep the collateral; and 3) if you want, enable you to surrender the collateral to the creditor without economically hurting yourself.

Power #1: Stop the Creditor from Taking the Collateral

The moment your Chapter 7 case is filed, all your secured creditors are immediately stopped from taking possession of your collateral. This is the same power that stops all collection activity by all your creditors again you and your property. You may hear this referred to as the “automatic stay.”

Very importantly, not only does the “automatic stay” stop secured creditors from chasing previously agreed to collateral, it also stops unsecured creditors from becoming secured ones, such as by stopping the IRS from getting a tax lien. Since secured creditors have tremendously more leverage, inside and outside of bankruptcy, this is a very helpful power that bankruptcy gains for you.

Power #2: Keep the Collateral 

Whether the collateral on a secured debt is your home, vehicle, appliances, or everything you own (as with an IRS tax lien), if you want to keep the collateral or whatever is included in a lien, bankruptcy can help in a variety of ways, including:

• If you are current on a secured debt and want to keep the collateral—such as with a vehicle loan—you can virtually always do so. Your creditor may be legally required to continue the relationship as originally agreed if you have upheld your end of the bargain.  And practically speaking, it will be very pleased to allow you to keep the account in good standing. This is also a good way for you to get a head start on rebuilding your credit.
• If you are not current on your payments, you will generally be given a limited amount of time to bring the account current. How much time will depend on the type of secured debt, and the flexibility of the creditor. Since you are no longer paying most or all of your other creditors, this may be a feasible option for you. (If you need more time to catch up on your vehicle or other loan, Chapter 13 may be a better option.)
• In some situations, the loan terms can be changed to waive payment of any missed payments, to lower the interest rate, and perhaps even lower the balance.
• Select kinds of secured debts—for example, judgment liens on your home—can be “avoided”—stripped off your home title.
• And maybe most obviously, a very legitimate reason to file a Chapter 7 case is to discharge other debts so that you can afford to pay your vehicle, home or other important secured debts.

Power #3: Dump the Collateral

Outside of bankruptcy, simply surrendering collateral to the creditor because you do not need or want it any longer, or just can’t afford to pay for it, is often not an economically sensible option. That is because you can end up still owing much of the debt after the creditor sells the collateral for substantially less than the amount of the debt, adds all of its sale costs to the debt, and then sues you for the remaining “deficiency balance.”

And if instead the creditor just forgives that balance, in some situations you can be hit with a serious income tax obligation. The amount forgiven may be considered “cancelation of debt income” upon which you may be required to pay income taxes.

Chapter 7 solves both of these problems. Except in very unusual situations, it would discharge (permanently write off) any “deficiency balance” after the surrender of any collateral. And the discharge of debts in bankruptcy is not considered “cancelation of debt income,” so you don’t have the risk of it is being taxed. As a result, you can freely surrender collateral in a Chapter 7 case if you want to, without worrying about owing the creditor or owing taxes for doing so.

If your financial life is legally simple, your bankruptcy will likely be simple. What is it about your financial life that makes for a not so simple bankruptcy case?

Bankruptcy can be very flexible. If your finances are complicated, bankruptcy likely has a way to deal with the issues that have piled up. My new clients are almost always amazed and relieved how well a bankruptcy game plan can solve their financial problems. As in life, sometimes there are trade-offs and important choices to be made. But usually, whether your life is straightforward or complex, bankruptcy can adjust.

To demonstrate this in a practical way, here are some differences between a simple and not so simple bankruptcy case.

1. No non-exempt assets vs. owning non-exempt assets:  In the vast majority of Chapter 7 and Chapter 13 cases, you get to keep everything that you own. But even if you do own assets that are not protected (“non-exempt”), there are usually acceptable ways of holding on to them even within Chapter 7, and if necessary by filing a Chapter 13 to do so.

2. Under median income vs. over median income:  If your income is below a certain amount for your state and family size, you have the freedom to file either Chapter 7 or 13. But even if you are above that amount, you still may be able to file under either Chapter, depending on a series of other calculations. Again, Chapter 13 is there if necessary, and sometimes that may be the better choice anyway.

3. Not behind on real estate mortgage vs. you are behind:  If you don’t have a home mortgage or are current on it, that makes for a simpler case. But bankruptcy has many ways to help you save your house. Sometimes that can be done through Chapter 7, although Chapter 13 has a whole chest full of good tools if Chapter 7 doesn’t help you enough.

4. No debts with collateral vs. have such debts:  The utterly simplest cases have no secured debts, that is, those with collateral that the creditor has rights to. But most people have some secured debt. Both Chapter 7 and 13 have various ways to help you with these debts, whether you want to surrender the collateral or instead need to keep it.

5. No income tax debt/student loans/child or spousal support arrearage vs. have these debts:  Bankruptcy treats certain special kinds of debts in ways that are more favorable for those creditors, so life is easier in bankruptcy if you don’t have any of them. But if you do, you might be surprised how sometimes you have more power over these otherwise favored creditors than you think. You can write off or at least reduce some taxes in either Chapter 7 or 13, stop collections for back support through Chapter 13, and in certain circumstances gain some temporary or permanent advantages over student loans.

6. No challenge expected by a creditor to the discharge of its debt vs. expecting a challenge:  In most cases, no creditors raise challenges to your ability to write off their debts. Even when they threaten to do so, they often don’t within the short timeframe they must do so. But if a creditor does raise a challenge, bankruptcy procedures can resolve these kinds of disputes relatively efficiently.

7. No debts from a business vs. business debt:  Although there is nothing about business debts that necessarily makes for a more complex case, that still tends to happen. These cases often have more unprotected assets, more troublesome kinds of debts, and often larger amounts of debts for creditors to get excited about. However, bankruptcy has ways to deal with all of this.

8. No ongoing business vs. active business:  A dead business is usually easier to deal with in a bankruptcy than a live one. Although you can continue operating a business while going through bankruptcy, that can be difficult to do under Chapter 7, and very likely will add some complications to a Chapter 13 case.

9. Lived in your present state for the last 2 years v. lived there less than 2 years:  For you to use the asset protections—exemptions—which are available to debtors filing bankruptcy in the state in which you are now living, you must have lived there for at least 2 years. Otherwise you must usually use the exemptions available to residents of the state where you lived previously. That can complicate your case because of a potential dispute with the trustee about which state’s exemptions actually apply, and then possibly disputes about how to apply an unfamiliar state’s exemptions.

10. Never filed bankruptcy vs. filed prior bankruptcy:  Actually, if you filed a prior bankruptcy, or even more than one, it may well make no difference whatsoever. But depending on the exact timing, a prior bankruptcy filing can not only limit which Chapter you can file under, it can even sometimes affect how much protection you get from your creditors under your new case.

We’ll dig into some of these differences in upcoming blogs. In the meantime remember that even though your financial life may seem messy in a bunch of ways, there’s a good chance that bankruptcy can clean it up and tie up those loose ends. It’s called a fresh start.

States recently received $2.5 billion from the major banks for foreclosure prevention and related help for homeowners.  But much of that is not being used for those purposes.

A relatively small part of the $25 billion settlement by the federal and state governments against the five major banks announced with big fanfare back in February involved actual money paid by the banks. (Most is in the form of credits the banks get for doing mortgage modifications and such.)

But one such direct payment is $2.5 billion from the banks straight to the 49 states that had joined in the settlement (all except Oklahoma). So what is supposed to happen to that money?

The answer to that should be found in the Consent Judgment, the document signed by all 49 states, the federal government and the banks, AND by the federal judge approving the settlement. Actually there are five consent judgments, one for each of the banks, but all containing identical language for our purposes. This language says:

“To the extent practicable, such funds shall be used for purposes intended to avoid preventable foreclosures, to ameliorate the effects of the foreclosure crisis, to enhance law enforcement efforts to prevent and prosecute financial fraud, or unfair or deceptive acts or practices and to compensate the States for costs resulting from the alleged unlawful conduct of the Defendants. Such permissible purposes for allocation of the funds include, but are not limited to, supplementing the amounts paid to state homeowners under the Borrower Payment Fund, funding for housing counselors, state and local foreclosure assistance hotlines, state and local foreclosure mediation programs, legal assistance, housing remediation and anti-blight projects, funding for training and staffing of financial fraud or consumer protection enforcement efforts, and civil penalties.”

(See pp. B-2 and B-3 of Exhibit B of the Consent Judgment.)

But the money is not being used for these purposes in many states, according to two different sources.  

A report by Enterprise Community Partners called $2.5 Billion: Understanding How States are Spending their Share of the National Mortgage Settlement says that “despite the language contained in the settlement, a number of states have diverted the settlement funds away from housing and foreclosure prevention activities.”

A more recent article by ProPublica, the independent investigative organization, is titled “Billion Dollar Bait & Switch: States Divert Foreclosure Deal Funds.” Its analysis concludes that “[s]tates have diverted $974 million from this year’s landmark mortgage settlement to pay down budget deficits or fund programs unrelated to the foreclosure crisis… . That’s nearly forty percent of the $2.5 billion in penalties paid to the states under the agreement.” This interactive map and table shows each state’s use of the funds.

Most creditors don’t challenge your write-off of their debts in bankruptcy. But if one does, the system is poised to resolve that challenge relatively quickly.

The last blog, and this one, are about what happens when a creditor raises one of the few available arguments to try to prevent its debt from being legally discharged. (This is separate from debts that by their very nature are excluded from being discharged—child support, most student loans, for example.) As emphasized last time:

• Most potentially dischargeable debts DO in fact get discharged. In most consumer bankruptcy cases, no creditor raises any challenges. To avoid any particular debt from being discharged, the creditor has the burden of establishing that the debt arose out of a very specific sort of bad behavior by you, one that is on a list that is in Section 523 of the Bankruptcy Code.
• Your creditors have a very firm deadline—usually about three months from the filing of your bankruptcy case—to formally raise such a challenge, or else lose the ability to ever do so.
• The challenge is raised by filing a “complaint” stating the facts and law under which the debt should not be discharged. This starts an “adversary proceeding,” a lawsuit focused only on this question.

Avoid Losing by Default

After a creditor files a complaint, THE most important thing to realize is that it will automatically win if you and your attorney do not file a formal answer at the court within the stated deadline. So contact your attorney immediately if you receive a complaint. Depending on the circumstances, you may have discussed this in advance and so could be expecting it. But sometimes it will come as a total surprise. Either way, get in touch quickly with your attorney to determine your game plan and begin acting on it.

Most Discharge Challenges Don’t Go to Trial

The adversary proceeding can go through all the steps of a regular lawsuit. After filing the answer, there can be “discovery”—the process of requesting and exchanging any pertinent information and documents, and holding depositions (questioning witnesses under oath, usually focusing on you and your alleged behavior in incurring the debt). And there could be various kinds of motions, pre-trial hearings, and a full trial. But these kinds of adversary proceedings rarely go through all these step and get to trial, because the amount of money at issue usually does not justify the cost involved for either side to pursue it that far.  So after both sides get a clear picture of the facts, there is usually a settlement. Sometimes one side or the other sees that the facts are not looking good and mostly or completely gives in. The debtor may concede that his or her actions fit the legal standards to prevent the debt from being discharged, or the creditor sees that it’s wasting its time and will dismiss the adversary proceeding. Or else the two sides come up with some sensible compromise.

But if there is enough at stake, or else if one or both sides are unreasonable and insist on getting a decision from the judge (these cases do not go to a jury), the dispute does go to trial. These trials usually last a half-day, or a day, or two, very seldom longer. At the end of trial the bankruptcy judge decides whether the debt is discharged or not. This decision can be appealed, though it happens rarely.

What’s So Quick and Efficient about All This?

Any litigation is very expensive, so you hope to avoid any discharge challenges. But bankruptcy court is a relatively fast and efficient forum for a number of reasons:

1) Because creditors have the opportunity to review your finances beforehand, much of the time they will not bother to raise challenges at all, avoiding the issue altogether, along with avoiding that additional cost to you.

2) If a creditor does raise a challenge, the issues are narrow and so the fight is usually focused on just a few critical facts. Less facts to dispute makes for a less complicated process.

3) Adversary proceedings move along fairly quickly. Compared to most state court and regular federal court litigation which often takes a couple of years, these kinds of adversary proceedings tend to be resolved in a matter of a few months

4) Because bankruptcy judges deal with these kinds of challenges all the time, they are extremely familiar with these legal issues. Compared to conventional trial courts where the judges often have to get into unfamiliar territory, and often deal with multiple parties with huge dollar amounts at stake, these adversary proceedings are usually quite straightforward.

Having a creditor object to the discharge of a debt can significantly complicate a Chapter 7 or Chapter 13 bankruptcy case. But these disputes are usually settled relatively quickly. Help this happen by informing your attorney about any threats made by creditors before your bankruptcy is filed, and then working closely with your attorney if a creditor follows through on its threat by filing a complaint.

Bankruptcy court is a relatively efficient place to determine whether or not you must pay a debt which the creditor says can’t be discharged.

One of the realities about filing a consumer bankruptcy case is that your case can get much more challenging if you have a very aggressive creditor. Most creditors take your bankruptcy filing in stride as a normal part of their business, figuring that you’re doing it for a sensible reason. But some creditors take it personally and react with more anger than good sense—often because they have some personal connection to you like an ex-spouse or former business partner. Or other more conventional creditors may honestly believe that they have grounds to prevent their debt from being discharged.

This blog, and the next one, are about what happens when there is such a creditor. The topic here is is not about creditors with rights to collateral, where the issues focus on what will happen to the collateral. It’s not about debts which will clearly not be discharged, like recent income taxes or child support obligations or most student loans. Rather this is about debts that would normally be discharged unless the creditor can prove that the debt arose of some bad behavior by you, usually involving some sort of fraud, theft, drunk driving, or such. Not just any bad behavior will do; it has to be one of a specific list that is in Section 523 of the Bankruptcy Code.

Creditors Have to Put Up or Shut Up

Before filing bankruptcy, you may be told by a creditor’s representative or collection agent that a debt can’t be discharged in bankruptcy or that they will fight you if you file bankruptcy. Most of the time they’re bluffing. But definitely make sure to tell your attorney about the threat so that he or she can determine whether it has any merit. If it doesn’t, that will avoid unnecessary worry for you. In the unlikely event the threat does have merit, that will help your attorney prepare for a challenge by the creditor if it comes.

Even if a challenge has legal merit, a creditor may not pursue it for practical reasons, mostly to avoid putting out more money—in filing fees and attorney fees—to try to prove that you can’t discharge the debt, only to risk losing that battle and wasting its money. At least in theory the law has a “presumption” that your debts will be discharged, so the burden is on the creditor to show that a debt should not be.

And you don’t have to sit around wondering for long whether or not any creditor will raise a challenge. Except in very rare circumstances (such as forgetting to list the creditor in the bankruptcy documents), any creditor that has any objections to the discharge of its debt has only 60 days from your hearing with the trustee to formally file an objection or forever lose its opportunity to do so. Since that meeting (also called the “meeting of creditors” or “341 hearing”) usually happens about a month after your case is filed, this means that within about 3 months after filing you will know.

The “Adversary Proceeding”

The creditor may tell your attorney in advance about an intended challenge, usually in an effort to get you to settle the matter by agreeing to pay part or all of the debt. But much of the time the creditor just files a formal complaint at the bankruptcy court. This begins what is in effect a lawsuit within your bankruptcy, called an adversary proceeding, focusing only on whether the creditor can prove the facts that the law requires for the debt to be excluded from discharge. This issue is usually NOT on whether you owe the debt in the first place—that’s usually assumed and admitted. Rather the issue would be whether, for example,  you incurred the debt by falsifying a credit application, by never intending to pay it through bounced checks or something similar.

Please come back to the next blog in a couple days for the rest of the story about what happens in these adversary proceedings.