When people are in a Chapter 13 bankruptcy and hit a snag in their case,  often they request a hardship discharge.  The name alone should indicate that this type of discharge is not given upon a mere request.  There are specific requirements that must be met before you can even be considered for this type of discharge. “I do not want to be in the bankruptcy case anymore” it not a good enough reason.

As attorneys we look to the bankruptcy code for guidance when seeking a discharge.  A hardship discharge can be found under 11 U.S.C. 1328 (b) for guidance as to who qualifies.  The attorney must first draft a motion requesting the hardship discharge and outlining specifically as to why you would qualify.  The first step in the analysis is whether or not your Plan is confirmed (approved by the court).  If the answer is yes the plan is confirmed and you qualify for a regular discharge  you can move on to the next step.

The attorney must determine whether or not you can continue to make the ongoing Plan payments.  The code describes this as a modification.  In layman’s terms it is what can you do to help your self?

Can you make the ongoing Plan payments?  If you cannot, why not?  If you surrendered something could you make the ongoing Plan payments?  If you reduced your expenses could you make the payments?  If you obtained another job could you make the payments?  These all may be considered when analyzing this step of a hardship discharge.  We must show that your failure to complete the Plan payments are due to circumstances for which you should not be held accountable for.  Once we complete this analysis we move on to the next step.

In filing a Chapter 13 you always have to consider what the trustee in the case would have been able to receive in the case if it were filed as a Chapter 7.   Let me try an illustrate this through an example.  You file a Chapter 13 and own a Hummer worth $20,000 at the time of filing the case.  The amount of money that you owe to the lender on the date of filing is $10,000.  This is known as lien against the vehicle and in this case the lien leaves $10,000 in equity in the Hummer if you sold the vehicle.  This $10,000 in  equity is an asset that belongs to the Chapter 13 at the time of filing.  If we use the State of Missouri exemptions I can protect $3,000 of that $10,000 equity.  This exemption will reduce the equity asset to $7,000.   $20,000 (value of Hummer) – $10,000 (debt owed to the lender to purchase the vehicle) – $3,000 (the amount of the exemption I am allowed to use to protect an asset) = $7,000 cash that may be used to pay down your debt if the Hummer was sold for value.

Therefore, in a Chapter 13 you must pay into your case $7,000 over the life of the case to be distributed to your unsecured creditors.  In a Chapter 7 you would either have to pay the Chapter 7 trustee the amount in equity ($7,000) or the trustee would take the Hummer and sell it.  Once the proceeds are received the trustee would pay off the lender first, pay you $3,000 because that is the amount protected and then take the remaining funds to pay  towards your unsecured creditors.

So in analyzing the hardship discharge qualification if the $7,000 had not already been paid into the court you would not qualify for a hardship discharge.  But what if you did not have any non-protected assets that you were paying to keep in a Chapter 13?  If under the Chapter 7 analysis the trustee would have received nothing then you would not have to pay anything into the Chapter 13 towards the unsecured creditors to receive a hardship discharge.  Bottom line if the Chapter 7 trustee would have received funds if this case was a Chapter 7, you will have had to pay in at least that amount to the unsecured creditors in the Chapter 13 case to be considered for a hardship discharge.

So if:

1. Your Plan is confirmed; and
2. You are eligible for a regular Chapter 13 discharge; and
3. Your current circumstances prevent you from making your ongoing Chapter 13 payments; and
4. The circumstances creating this inability to pay is out of your control; and
5. You have paid into the Chapter 13 towards the unsecured creditors the amount that would have been paid if you filed a Chapter 7; and
6. There are no changes you can make to allow you to make the ongoing Plan payment;
7. You just might qualify for a Chapter 13 Hardship Discharge.

Remember that knowledge is power.  The more knowledge you have about the bankruptcy code the more power you will have in obtaining a discharge in your bankruptcy case.

It is a real accomplishment to complete your Chapter 13 case.  In an environment where jobs come and go, unexpected expenses can pop up and more than two-thirds of all Chapter 13 plans fail, anyone who fulfills the terms of his Chapter 13 plan should take pride in this milestone.

Be aware, however, that making trustee payments for five years may not be enough to get your Chapter 13 discharge.  As I previously wrote on this blog, every Chapter 13 debtor must obtain a Financial Management certificate and submit through counsel a certificate of completion for this post-filing educational course.  If you do not submit the certificate, your case will be closed without the issuance of a discharge thereby potentially leaving your exposed to post-bankruptcy collection actions.   If you choose to ask the court to reopen your case so that you can file the financial management certificate you will incur additional time and cost.

A second possible hurdle arises from Bankruptcy Code Section 1328.  This Code Section precludes the judge from issuing a discharge if you do not certify that all domestic support obligations that have come due during the pendency of your case have been paid.   In the Northern District of Georgia, where I practice, every Chapter 13 debtor receives a Section 1328 certificate to complete as their case winds down.

If you state on your certificate that a domestic support (i.e. child support or alimony) was not paid, then the judge will have to hold a hearing to determine whether your failure to pay is beyond your control or not.  If the judge finds that your failure to pay these domestic support obligations is not excusable, your case will close and you will not get your discharge.

Sometimes it can be tempting to ignore an issue if no one is saying anything and no pressure is being applied.   In the case of child support in Chapter 13 you cannot ignore the obligation even if the custodial parent or child support enforcement is saying and doing nothing.  Otherwise you could end up with a sterling five year payment history in your Chapter 13 but no order of discharge to show for your efforts.

Happy Groundhog Day!

Lately the same refrain keeps cropping up in my practice:  why did you wait so long?  I understand that very few people want to file bankruptcy, and I agree that the decision to file bankruptcy is an important one.  And while it is common to hear that bankruptcy should be a last resort, it is also true that you can wait too long.  So, in honor of Groundhog Day, while we wait to find out when spring will arrive, here are some problems that might crop up if you wait too long to file bankruptcy.

You exhaust your reserves.  This is probably the most common consequence of just hanging on too long, trying to avoid bankruptcy.  You are trying to keep up with mortgage payments or credit card payments after a job loss, illness, divorce, or the like, and you exhaust your savings, tap into your 401k or IRAs, incur taxes and penalties as a result, which makes the whole financial situation still worse.  You use up the resources that would make it easier to make a fresh start, and make it harder to recover financially.  It is easy, and probably natural, to just try to hang on and keep doing what you have always done.  It’s smarter to take an honest look at your situation and ask yourself whether you are going to be able to deal with your debt without some help.

You may lose control of assets that might otherwise be used to help you make a fresh start.  That is often the case when creditors sue you and obtain judgments against you.  A judgment becomes a lien against real property, which can be especially significant if you have investment property, or have inherited property, or, God forbid, you are holding title to family property to “keep it safe.”  The effect of a judgment on property depends on several factors, including where the property is located, whether you are entitled to claim it as exempt, and even what state you are in, but you shouldn’t wait until its a done deal to figure out what the effect will be.  At that point it may be too late.

Other issues can be decided in a law suit that will affect your ability to make a fresh start.  The amount of a debt may be determined to be higher than you anticipate, for example, by the addition of attorney fees and expenses.  Or, the court may enter a finding a fraud against you that will allow a debt to survive bankruptcy.  Other findings may also impact your fresh start as well, and if you are already in financial distress, you may find that it is prohibitively expensive to fight a lawsuit, or worse, several lawsuits.

Don’t wait until the bitter end to consider bankruptcy, and seek out competent legal advice about your bankruptcy options.   You might think that if you go see a bankruptcy lawyer that lawyer is automatically going to recommend bankruptcy, but that is not the case.  Most reputable bankruptcy lawyers are also knowledgeable about alternatives, and will advise you about those options, as well as tell you what may happen if you do nothing.  I regularly advise clients against filing bankruptcy (and sometimes that advice is because there is nothing left to protect).  You have nothing to lose, and quite a bit to gain by talking to someone as soon as you recognize that there is a problem, rather than waiting until you have no options.

Capital One violated the bankruptcy discharge thousands of times and got caught, as was recently reported by the Wall Street Journal.  It filed claims in second bankruptcy cases based upon debts which were already discharged in earlier cases.

As my colleague Andy Miofsky wrote, “There is a reason Capital One Bank portrays credit card banks as a horde of marauding invaders.  Merriam Webster’s Dictionary defines maraud as ‘‘to roam about and raid in search of plunder’.’’  Here, it plundered bankruptcy estates.  It caused other creditors to receive lower payments and some debtors to pay more than they should have.

This credit card issuer files a great number of claims every month in bankruptcy cases.  In 2008 the United States Trustee filed suit against it in Massachusetts, stating that it had filed 5,600 illegal claims based on debts which were already discharged in bankruptcy. 

An independent auditor was appointed to review the results of Capital One’s belated investigation – you know, like closing the barn door after the horses have escaped.  The auditor determined that about 15,000 illegal claims had been filed.  This figure used Capital One’s own waiver of exclusions of claims otherwise included in the illegal claims category where it felt it was too burdensome to be accurate.  The auditor is now working on refunds of payments made to Capital One based on these bankruptcy-discharged and illegal claims, plus appropriate attorney fees.

This just burns me.  There’s a legend at the bottom of every proof of claim form which states that the penalties for a false filing is up to a $500,000.00 fine and five years’ imprisonment.  The United States Trustee did not seek a fine, much less any imprisonment.  But it regularly seeks to deny or revoke the discharge of a debtor caught filing false statements.   How about penalizing Capital One by prohibiting any claims for a period of time?  There’s no lesson to be taught, or penalty to be incurred, if all it suffers is the return of its wrongful gains.

Can you spell “Double Standard”?  I can.

Image Credit:  radacina

Recently I received a notice from the bankruptcy court that my client’s Chapter 7 case has been closed without the issuance of a discharge order because my client never completed his mandatory financial management course.   This means that in order to get his discharge, my client will have to pay a filing fee of $260 plus attorney’s fees (I usually charge $240) to get his case reopened so that we can file his financial management certificate and he can receive his discharge.

While reasonable people can debate the merits of requiring bankruptcy debtors to spend the time and money to take two financial counseling courses – one must be completed prior to filing and the second after filing – it is clearly a waste of money to spend $500 because you did not get around to taking a $35 course that may take an hour or two of your time.

My colleague, Dan Press, suggests that you and your attorney should wait to file your financial management course right at the due date, which is 45 days after the 341 hearing.  Dan points out that in the event that you unexpectedly incur significant post-filing debt, you may want to have your case closed without a discharge so that you can, in theory, file another Chapter 7 without having to wait the 8 years wait that the Bankruptcy Code mandates in cases where a discharge is entered.   Dan’s suggestion, by the way, may not necessarily work in the district where you file and the Code may be changed in the future to disallow this, so check with your attorney about this “immediate refiling strategy.”

Note that there is a big difference between waiting to file your certificate and waiting to take your course.  If you provide your lawyer with a Financial Management course certificate and your lawyer fails to file it on time, I think you should expect your attorney to bear the cost of paying the filing fee and filing to reopen your case.   However, if you do not obtain your financial management certificate, this cost burden will fall upon you.

I can tell you from what I see in my practice that my clients often forget about the financial management course requirement despite a notice of this requirement in the filing confirmation notice they receive from the Clerk of Court and reminders from me.   If you are represented by a high volume firm, or by a lawyer who only files a few cases a year, you may not get any reminders other than what you receive from the court.

I also advise my clients to send me a copy of their course completion certificates directly.  In theory, most financial management course vendors will email me the certificate, but that assumes that the vendor copies down my email correctly and sends the form.  One of the messages of the post-filing course is to take control of your financial future and taking control of important decisions like this is a good start.

The headline caught my eye: “Is Bankruptcy ‘Business as Usual’ for Airlines.’ ”  On NPR, no less.  Reporting on the Chapter 11 filed by American Airlines, the article goes on to note:

You might say it’s almost business as usual for the airline industry. United, Northwest and Delta have all taxied down the Chapter 11 tarmac. US Airways did it twice in as many years.

Airlines use Chapter 11 as a normal business tool, like raising prices (baggage fees, anyone?) and layoffs. So do auto manufacturers, restaurant chains, department store chains, grocery store chains.  Even municipalities and churches are using bankruptcy to restructure their debt, in an attempt to stay afloat and continue to operate.  As noted in the NPR piece, there used to be a much greater stigma attached to Chapter 11 filings; now it seems to cause barely a ripple.

Yet while bankruptcy has become business as usual for businesses and even governments, personal bankruptcies are still highly stigmatized.  In more than twenty years of bankruptcy practice, I don’t think I’ve met more than a hand-full of people who aren’t troubled, or even traumatized, by the prospect of facing bankruptcy, even if their bankruptcies are the result, direct or indirect, of the actions of their banks, or employers, or health care providers.  Individual debtors facing bankruptcy often feel further traumatized by a system which treats them as inept at best, or foolish or criminal at worst.

Yet such attitudes are actually foreign to the foundations of bankruptcy laws in this country.  First and foremost is the recognition that allowing people, as well as businesses, to restructure their debt is productive for all of us.  Having learned something from the debtors’ prisons and colonies of Europe, as well as the “broken bench” of the guild system, both of which left a debtor’s family dependent on the alms of the church or wards of the state, our founders realized that a system which allows an honest debtor to periodically discharge overwhelming debt, and retain the tools to support his family and rebuild his financial future is a better outcome for us all.  And perhaps the single-most important premise underlying bankruptcy laws today is the idea that only an “honest but unfortunate” debtor is eligible for a bankruptcy discharge.

So, at a time of almost unprecedented financial hardship for individuals, and at a time when businesses use bankruptcy as just another way to improve their bottom line, shouldn’t the stigma associated with bankruptcy be fading?  Maybe so, but it hasn’t.  All my clients struggle with the morality of the decision to file bankruptcy; virtually all of them wait too long, and suffer either emotionally or financially as a result.    Personally, I admire them for it, even when I wish they would let me help.  And, though I understand that a corporation doesn’t have morals, or a conscience, the people who run them do, and I could wish some of them were a bit more like my clients.  But I also think it is important to consider the source of your financial problems in deciding whether to file bankruptcy.  If you are an honest but unfortunate person, who is dealing with an overwhelming debt load because of job loss, illness or medical expenses, divorce, or any of a dozen other reasons that are, to one extent or another, out of your control, come see me or one of my colleagues.  Like the airlines, manufacturers, retailers and municipalities, you may also benefit from bankruptcy.  Bankruptcy is a legitimate way to a more productive life.

Bankruptcy is not a dirty word.

Photo: drbimages/iStock

I frequently meet with clients who own a business that has financial problems. It may not be able to pay its bills as they come due, there may be an eviction threatened, or a lawsuit. These clients have done some homework, and usually start out our meeting by saying that they want to retain me to file Chapter 7 bankruptcy for their corporation or LLC.

They are also surprised when I tell them that for most businesses, Chapter 7 makes absolutely no sense.

Why?

Chapter 7 is the type of bankruptcy that most people think of when they think of bankruptcy. For individuals, it results in the discharge of general unsecured debts, such as credit cards and trade debt. It allows for the discharge of some older taxes. So why wouldn’t it make sense for a business in financial difficulty to file?

The answer lies in Section 727(a)(1) of the Bankruptcy Code. This section, which deals with Chapter 7 discharges, says: “The court shall grant the debtor a discharge, unless the debtor is not an individual.” Since corporations and LLCs are not individuals, they cannot receive a Chapter 7 discharge.

This means that, although a corporation or LLC can file for Chapter 7, it cannot receive a discharge. So why would it even think about filing for Chapter 7? That is the subject of an earlier blog I wrote on this topic.

Filing a Chapter 7 or Chapter 13 bankruptcy can get your Driver’s License back for you when you have lost your license because of no have insurance!

Many States require people that own cars to have motor vehicle liability insurance.   These laws, often called compulsory motor vehicle liability laws, generally require that if you own a car, that you maintain at least a minimum amount of insurance on your car so that if you are involved in an accident and you cause damage to someone else’s car or injure them, that they can recover from your insurance for their damages.

Unfortunately, car insurance is expensive, and when someone is having financial problems, they may decide to stop paying for their car insurance and let the policy be cancelled.  Debt collectors will call and yell, but nobody calls to yell at you if you don’t pay your insurance bill.

To give teeth to these vehicle liability laws, many States may also suspend a Driver’s License upon notice by an insurer of the cancellation of the policy or upon notice of an accident with no insurance available to pay for the damages.

While it is never a good decision to drive a car without insurance, the good news is that you can get your Driver’s License back by filing a bankruptcy.

In 1971 the U. S. Supreme Court in the case of Perez v. Campbell stated under 11 U.S.C. 525(a) of the Bankruptcy Code, if the debt that caused the suspension of the license was discharged in a bankruptcy, then the license reinstatement could not be denied.

However, even though you may be able to get your Driver’s License back, you may still be responsible for the fine associated with the accident.  Generally speaking, the fine itself is not dischargeable in a bankruptcy since fines owed to a “governmental unit” are nondischargeable.  You will also likely be required to pay any State required reinstatement fees.   Often whether the fine itself can be discharged will depend upon whether the fine is treated as a civil or criminal matter by your state.  In New Orleans, Louisiana where I practice, we have both civil traffic tickets and criminal traffic tickets.  The following articles discuss the specific rules that apply to reinstatement of a Driver’s License in North Carolina and Kansas.

Also, debts incurred as a result death or personal injury that resulted from drunk driving or driving under the influence of a drug or other substance are not dischargeable.

How can a person get away without paying me when they file for bankruptcy? The Bankruptcy Code and Rules written by the United States Congress are designed to give a fresh start to the honest debtors who have become unable to timely pay their debts in hopes that they once again become productive members of society and not dependent upon public assistance to live. Unfortunately, this means that creditors sometimes lose their money. This is a policy decision by Congress that the court cannot change. However, there are guidelines as to who may be a debtor and laws relating to possible abuse with strict consequences if any laws are broken. The court functions as a neutral impartial body to rule on disputes that arise in these cases.

When you file a Chapter 7 bankruptcy you must list all of your assets and debts.  Unsecured debts are discharged giving you what is often called a Fresh Start.

Payday Loans are a form of unsecured debt, although many people believe that these debts are secured.

In fact, since the borrower is required to turn over a post-dated check to the Payday lender, most believe that they can go to jail if they do not make good on the check or if the check bounces.  I have had potential clients that have been told that they will go to jail for failing to honor a Payday loan.

Telling someone that they will be prosecuted or go to jail is not true.  To be guilty of writing a worthless check the person writing the check must have written the check with the intention of defrauding the party receiving the check.  Since the Payday lender knowingly accepts a post dated check, the lender knows that the check is not good at the time it receive the check.

Occasionally I will have clients that want to pay back these loans.   The “logic” of wanting to pay them back is that the client feels that the Payday lender has done them a favor by lending them the money.

However Payday loans, while marketed as a loans to be used on a one-time basis, are in reality taken out by people when they are their most vulnerable and their most desperate.

The facts are as follows:

• The high interest rates (usually shown as a fee for borrowing the money)  make it difficult for borrowers to repay these loans.  I personally have seen potential clients come in with fees that equate to interest rates of 425% to 600%.  To read a detailed example of how much can end up being paid, consider reading:  “Payday Loans:  How To Borrow $300.00 And Owe $3,000.00″
• Because they are difficult to repay, many consumers end up paying additional “fees” in order to roll the loan over.  These fees can often end up being paid several times for one loan.
• Because of this, many consumers end up paying more in fees than the than the amount they originally borrowed, putting them into worse financial shape then when they started.

Be sure to tell your attorney about your Payday loans so they can be included in your bankruptcy.