Posts Tagged ‘chapter 13’

The Discharge

WHAT IT IS:

It’s the reason one files for bankruptcy relief….to obtain a discharge.  A discharge is a Federal injunction prohibiting the debtor’s creditors from ever attempting to collect from the debtor on account of a claim it had against the debtor at the moment the debtor filed its bankruptcy petition.  Essentially, it absolves a debtor of its legal obligation to repay debt the debtor had before it filed for bankruptcy relief.

WHEN IT HAPPENS:

A debtor’s discharge is effective when the bankruptcy court enters an order granting the debtor a discharge.”  In a chapter 7 case this typically occurs approximately 100 days after the the bankruptcy petition is filed.  In reorganization cases, that order is entered after the completion of the reorganization plan.

WHAT IS ITS SCOPE:

The discharge is very broad and affects credit card debt, medical debt, business loans/guarantees, and other various debts.  There are, however, some exceptions; not every debt is subject to the discharge:

  • Debts such as child support, alimony or spousal support are non-dischargeable (this may include childcare, school-related expenses, health insurance, and out-of-pocket medical costs).
  • Some taxes are non-dischargeable, while others may be discharged (depending on the age of the tax obligation, and whether the returns were timely filed).
  • Debts incurred due to fraud, or misrepresentations on financial statements/loan applications are non-dischargeable.
  • Debts incurred due to theft, breach of fiduciary duty, or embezzlement are non-dischargeable.
  • Debts incurred due to malicious and willful injury to another person or property are non-dischargeable.
  • Court fines are non-dischargeable.
  • Debts incurred due to the operation of motor vehicle while intoxicated are non-dischargeable.
  • Student loans are typically non-dischargeable.

These are just the more common exceptions; there are other exceptions that might apply, and if you are considering bankruptcy, you’ll want to discuss your circumstances with an attorney to see if any exceptions apply in your case.

Also, the scope of the discharge depends on the chapter the debtor files.  For instance if a debtor file a chapter 7, it may not discharge a debt incurred in a divorce decree (if such debt is not child-support, alimony or spousal support), but the debtor may discharge that obligation if the discharge is entered pursuant to chapter 13.  A debtor who is not an individual (but a corporation, or an LLC) may not receive a discharge in a chapter 7, but may receive a discharge entered pursuant to chapter 11.

Just because a debtor receives a discharge does not mean it cannot voluntarily repay the debt if it is so inclined.  While the debtor may not be under a legal obligation to repay it, it may desire to do so and the bankruptcy code allows it to.  A discharged debt cannot be revived, so one need to worry about only repaying a portion of the discharged obligation; simply paying a fraction toward the discharged debt does not revive the debt.

Now, the discharge simply discharges the debtor from having to repay the debt.  It does not affect any security interests a creditor may have in any collateral (such as a home or a car).  To alter the creditor’s security interest, the debtor must reorganize through one of the reorganization chapters (9, 11, 12, or 13) and have a reorganization plan confirmed by the bankruptcy court.  Therefore if a chapter 7 debtor discharges his home or car loan, the lender can still foreclose on the home or repossess the vehicle.  Hence the common inquiry from potential debtors: “Can I file bankruptcy and still keep my home? or car? ”  And typically the answer is: “Yes, you can.  If you are able.”

A discharge is automatically granted during the process of a bankruptcy proceeding.  And unless the court orders otherwise, all debts but those by code definition to be non-dischargeable will be subject to the discharge order….including car and home loans.  Thus, with regards to those debts, if a debtor takes no action after filing the bankruptcy petition, the debts will be discharged and car or home lenders will likely proceed with repossession or foreclosure.  However, a debtor can take affirmative action to except certain debts from discharge through a process called “reaffirming a debt.”  In a nut shell, this process involves the debtor and creditor signing a “reaffirmation agreement” in which the debtor agrees to remain liable for the balance owed on the car or home loan and the the lender agrees not to repossess the car or foreclose on the home so long as the debtor is not in default of the underlying loan agreement.  Essentially this allows the car or home loan to pass through bankruptcy.  The positive of this is that the debtor gets to retain the car or home.  Also reaffirmed debts will be disclosed on the debtor’s credit report, thus timely payments help improve a debtor’s credit post-bankruptcy.  The drawback is that should something happen to the debtor that prevents the debtor from paying the debt, the debtor cannot go back and use the discharge and a defense to having to pay the debt.  Additionally, a court will only allow a debtor to reaffirm a debt if the debtor can afford to do so; thus the debtor will need to show that even after reaffirming a debt it has still has positive income (at least $0.01) each month.

It is often espoused from the court that bankruptcy is for the honest, but unfortunate debtor.  Thus if a debtor fails to be forthcoming with information, or misleads the bankruptcy court, the trustee, or its creditors a debtor may be denied a discharge, or have his discharged revoked.  This is not something that any debtor wishes to have happen to him or her.  In such an event, the debtor can likely lose what non-exempt equity it may have and still be obligated on the debts it attempted to discharge in bankruptcy.  Further the debtor cannot go back to the court later in life and attempt to discharge the same debts.  Thus it is vital for a debtor to be honest and forthcoming with information about its financial affairs so to not risk the denial or revocation of a discharge (not to mention its a Federal felony to commit bankruptcy fraud!).

National Data Center (Chapter 13 Case Information)

The National Data Center is a non-profit outfit that assists  Debtors, Debtors attorneys, Creditors and Creditors attorneys by providing up to date information regarding the particular chapter 13 case in which the Debtor, Creditor, or attorney may involved.

This is a great service for both Debtors and their attorneys alike.  The process is rather simple and after 4 easy steps, a debtor has a plethora of information available to him at his fingertips.

Step 1:  Enter Your Case Information.  When signing up with the NDC.org, the Debtor will need his case information on hand.  The 341 Notice of Meeting of Creditors is really all that is needed as it contains the Debtor’s name, case number, trustee, and Trustee State.

Step 2: Security Questions.  All the Debtor needs to do here is answer a couple questions like, what is his mailing address? From a list provided, select a creditor of the debtor.  Rather simple if you ask me.

Step 3: Create an account.  This requires the creation of a username and password and the entry of an email address.

Step 4: Terms and Conditions.  In order to use this service the Debtor must accept NDC’s terms and conditions.

And by completing these simple steps, the debtor will have at his fingertips information like:

– payments received by the Trustee

– disbursements made by the Trustee

– amounts paid to particular a creditor

– funds the Trustee has on hand

– claims filed by creditors

….and much more.  Check it out for yourself.

The 341 Meeting of Creditors

It happens in EVERY case.  11 USC 341(a) provides that the US Trustee shall convene and preside at a meeting of creditors.  Typically in chapters 7 and 13, in Idaho at least, the US Trustee schedules the meeting of creditors and appoints a standing trustee to preside over the meeting; in a chapter 11, however, the US Trustee will convene and preside over the meeting.

In the Chapter 7 context, I see the Meeting having two primary purposes.  First, it is where the Debtor stands up and physically appears to support his bankruptcy petition and verify, or explain, its contents.  Second, it provides an opportunity for the Trustee to inquire into the breadth, or scope, of the bankruptcy estate.

With regards to the first purpose, this involves the Trustee verifying the Debtor’s social security number and a picture ID.  Subsection 341(d) also requires the Trustee to apprise the Debtor of:

(1) the potential consequences of seeking a discharge in bankruptcy, including the effects on credit history;

(2) the debtor’s ability to file a petition under a different chapter of this title;

(3) the effect of receiving a discharge of debts under this title; and

(4) the effect of reaffirming a debt, including the debtor’s knowledge of the provisions of section 524 (d) of this title.

This is basic, rudimentary stuff merely required as a formality for the US Trustee to verify the person at the Meeting of Creditors is the actual person who filed bankruptcy and the consequences of seeking a bankruptcy discharge.

The second prong of the Meeting has an entirely different goal:  $$$$$$!  The Trustee is looking for money…..well, non-exempt equity and avoidable transfers that she can convert into cash.

While the focus of the Trustee’s inquiry varies, it’s almost always geared assisting her in determining whether there is any non-exempt equity to liquidate for the benefit of your unsecured creditors, or any pre-petition transactions she can avoid (i.e., reverse).

The Trustee already has the information provided in the bankruptcy schedules and so her inquiry may be founded on that information.  The Trustee also has access to public records so she may inquire with the Debtor regarding any information she finds in her public record search that may be consistent or inconsistent with the information in the schedules.  Additionally, someone may also have tipped off the Trustee with insider information of the Debtor that the Trustee finds interesting (i.e., an ex-spouse or a disgruntled ex-business partner).

It is not uncommon for the Trustee to request documentation for her review prior to the Meeting of Creditors.  This may include, among other things, bank statements, promissory notes, deeds of trusts, security agreements, vehicle titles,  tax returns, divorce decrees, or pictures of assets.  Should the debtor fail to timely provide the requested information, the Trustee may continue the meeting.

In the Chapter 7 realm, this is usually the only meeting that the Debtor will attend during his case.

In the Chapter 13 context, there is a third prong to the 341 Meeting of Creditors.  Because a chapter 13 requires the debtor to pay into the plan all his disposable monthly income, the Trustee is behooved by inquiring into the debtor’s income and expenses going forward.

 

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