Tag Archives: Discharge

Bankruptcy Discharge Injunction

Why Your Business Probably Won’t File for Bankruptcy

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Chapter 7 is the most commonly filed chapter of bankruptcy — but it is very rarely filed by a Corporation, Partnership or LLC.  We can all name lots of businesses that have filed Chapter 11 bankruptcy.  Traditionally, that has been a large, expensive, complex reorganization.  Exxon, most of the Airlines, General Motors, Sears, J.Crew.  It is a long list.  I will bet, however, that you can’t name a single Corporation that has filed a Chapter 7 Bankruptcy.

The reason for that is actually quite simple.  Lots of business owners would love to file a Chapter 7 for their wholly owned LLC and walk away from the business debt — except they can’t.  You see only an individual (that means a human being) can get a discharge in a Chapter 7 bankruptcy.  That means that if a corporation or an LLC files a Chapter 7 bankruptcy, it gets to turn over all of its assets to the Trustee to administer for the benefit of its creditors, but it doesn’t get out of its debt.  Now, it comes out of the bankruptcy with no assets with which to pay any of its bills — but it still legally owes the money.  So, you spend a lot of money, you turnover the business assets to the Trustee, you expose the owners and managers of the business to potential liability — and get absolutely nothing in return.  Not generally a great plan.

Instead, what generally happens, is that the business owners liquidate the assets themselves.  They have to stay within certain legal parameters, but they do have some control over how the assets are liquidated and how the proceeds are distributed.  Also, they can pay themselves a reasonable amount of money for doing it.  Then, they shut down the Corporation or the LLC.  Of course, since most small business debt is guaranteed by the owners (one way or another) the owners may then need to file their own Chapter 7 bankruptcy, but they are eligible for a discharge.  Also, this doesn’t mean that the owners inherit the unpaid business debts. If the owners weren’t originally liable for the debt, they don’t become liable for it.  It is just rare for small businesses to incur any significant debt without a personal guaranty from someone.

Of course, since February of 2020 there is now a viable small business reorganization subchapter.  So, it is now much more viable to reorganize a small business in a bankruptcy, if remaining in business is a viable option.  If it isn’t, however, it is rare to shut down a small business in a Chapter 7 Bankruptcy.  There are better ways to deal with the business entity outside of bankruptcy then inside.

Elaine 

Safer in Bankruptcy — the Wrap Up

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At the conclusion of a bankruptcy an Order is entered called the discharge.  It is the discharge that functionally eliminates the debtor’s personal liability (meaning his legal responsibility for paying) the debt incurred prior to the bankruptcy filing.  In many ways the discharge is the wrap up of the whole bankruptcy process, and it makes everything that happens before it final and permanent.

The downside of the discharge is that it also means the debtor is once again outside the safety of the bankruptcy court and back in the real world — although without all the baggage that caused the bankruptcy filing in the first place.

Clients are thrilled when they get their discharge.  It is OVER!  I am free!  I am frequently a bit wistful, because I know that when something else happens (and life is always happening), the debtor may be less comfortable inside the bankruptcy; but the debtor is far safer.  Inside of a Bankruptcy the Debtor is protected by the Automatic Stay and the Confirmation Order (if in a reorganization chapter).  Those things mean procedural protections and, most importantly, time, to deal with whatever life throws at you.

We have a false feeling of control over our lives.  Really what makes debt and bankruptcy both so scary is the sense of being out of control — but we are used to that.  We aren’t used to bankruptcy so it feels scarier, when in many cases it is far safer.

We are living in the most uncertain times that any of us have lived through, and we are all going to have to learn new survival skills.  I hope that for you bankruptcy won’t be one of them, but if it is, try to be less anxious rather than more.

Elaine

Safer in Bankruptcy — Part 2 — The Automatic Stay

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The instant that a bankruptcy is filed an order is entered automatically, and it stays (or temporarily stops) all collection activity against the debtor or property of the debtor.  Instantly.  Automatically.  Boom.  All collection activity must stop.  That means lawsuits, wage garnishments, nasty letters, annoying phone calls (Ok, so I don’t know any court that has managed to stop the car warranty calls, but we’re working on it.).

That order remains in place until either the Court modifies or lifts it, the Debtor’s discharge is entered or the case closes without a discharge.  The automatic stay is designed to give someone who has just filed for bankruptcy literally months of breathing room.

Where the automatic stay is most likely to get cut short is when someone files for bankruptcy and doesn’t continue making payments on a secured loan — most commonly a car payment.  In that case the lender has the right to ask the court to lift the stay and let them repossess the car.  A chapter 7 bankruptcy is not the right place to be if you are not current on a vehicle that you need to keep.  If that is the case, file a chapter 13 bankruptcy.

However, if you find yourself with more debt than you can pay, but you are current on your car loans and mortgage (if you have them), but your phone is ringing off the hook, you are afraid to open your mail, and your payroll office has just received a wage garnishment; the automatic stay is the legal equivalent of a Calgon bubble bath commercial from the 70’s.

Elaine

Pay Attention When Filing for Bankruptcy

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When you file for bankruptcy, you are required to provide a ton of information to the Court and the Trustee assigned to your case.  Although it is true that no one is perfect, everyone makes mistakes, there are things about all of our lives that we frankly don’t know; none of that explains the multitude of phone calls I get from people who seem to know less about their lives than I do — and I haven’t even met them yet.

When I get a call from someone about filing for bankruptcy I begin by asking some basic questions — about how much debt, what kinds of debt (credit cards, medical bills, taxes, repo’s, pending law suits, student loans, child support), whether or not the person has been sued recently, have they filed their taxes, do they own their home, are they current on mortgages and car debt.  I’m not looking for exact figures, but I do expect that people have a basic grasp on things.

When I get answers that don’t make sense, I start typing.  I start with the Supreme Court’s online network that includes dockets for all Oklahoma District Courts.  It is searchable by name.  That shows me very quickly every lawsuit filed in the last ten or more years against someone (although, admittedly, when someone’s name is Tim Smith, this is less than helpful).  Then, I check the County Assessor’s website for real property ownership records — again, searchable by name.  Then, I check the County Clerk’s website for judgment liens, tax liens, transfer of real estate, mortgages and UCC-1 filing statements.

In just a couple of minutes I frequently know a lot more about the person I’m talking to then they seem to.  I can’t count the number of people who tell me that they’ve never been sued — they are just having their wages garnished.  Really?  Sure, child support and some student loans can do a wage assignment or administrative garnishment without a lawsuit; but that is almost never the case.  They just weren’t paying attention to the question, or they didn’t want to admit to it, or — something; and to a large extent it is my job to try and catch when a client isn’t paying attention and doesn’t answer something correctly or accurately; but there are limits to what I can do.

Ultimately, it is the client who signs bankruptcy papers.  It is the client who can have his discharge denied for failure to disclose assets, or even liabilities.  It is the client who can go to jail for bankruptcy fraud.

I understand that the events that frequently lead up to a bankruptcy filing are the kinds of things that get out of control and thinking about them can be at best depressing and at worst terrifying.  Still, if you tell your lawyer about the garnishment summons your employer just got, your lawyer can help you get your case filed in time to stop it, notify the creditor to release it ASAP when the case is filed, possibly even help recover funds.  If you tell your lawyer that your Mother has added your name to her house — to avoid probate, of course.  In addition to helping you educate your Mother about better and safer options, your lawyer can help keep your Mother’s house out of your bankruptcy.  If you tell your lawyer that you have been sued, your lawyer can help you determine whether or not you need to have judgment liens removed from your house.

Oh, and if you don’t tell your lawyer about these things, odds are very good that your Bankruptcy Trustee will find out about them.  Of course, that will happen after the case is filed, and your hands will be pretty much tied.

So, if you find yourself thinking that you have more debt than you can pay.  Stop.  Take a deep breath — and think.  Think about all the things you have been trying not to think about, because it is just all too foreign and overwhelming.  Then, call a local bankruptcy lawyer for help; and be prepared to answer questions and ask questions until you are comfortable that you have disclosed everything you need to disclose.

Elaine

Lawsuits, Bankruptcy and the Automatic Stay

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A bankruptcy filing automatically stays (or temporarily stops) all collection activity against the debtor or property of the debtor; and that includes virtually all lawsuits involving the debtor. That is the easy answer. Yes, a bankruptcy filing will stop that lawsuit against you! It just isn’t always the whole answer.

Most of the time when people call they are asking about a simple collection case – an old credit card, medical bills, maybe the balance due after a repossession. In those cases a bankruptcy filing stays the lawsuit; and when the discharge is entered a few months later, the lawsuit is stopped for good. That answer is accurate for the vast majority of callers. So, if you are worried about a simple collection case, a Bankruptcy will fix it.

The problem comes when whomever answers the phone in the law office doesn’t ask enough questions. If the lawsuit isn’t a simple collection case, for instance, if the person calling is being sued by a former employer for stealing or embezzling money. If the lawsuit is alleging any type of fraud. If the lawsuit is alleging intentional and willful injury to property. If the lawsuit is a paternity action or an attempt to collect past due child support or alimony. Those lawsuits won’t just go away, although the Bankruptcy filing will slow them down some. The worst scenario, though, is a case that looks look like a simple breach of contract case or maybe simple negligence, it may be between former business partners or friends; but the case has gotten emotional and angry and it has become more about a pound of flesh than recovering specific economic damages. In other words, the worst case scenario is a lawsuit that has started to look more like a divorce than normal litigation.

In those cases the answer is still correct that a Bankruptcy filing will stay the lawsuit – it just might not end it, and it really might not stop the fight.

The Bankruptcy Code includes a list of things that are excepted from the Debtor’s discharge. That means that even though the Automatic Stay might stay the problem, when the stay is replaced by the discharge, this type of problem will still be there – waiting. The most common of these are debts incurred shortly before the bankruptcy was filed (presumably with the intention of filing bankruptcy and not paying it), student loans, recent taxes, child support or alimony.

Some of these require that something called an Adversary Proceeding be filed within the bankruptcy. Some of them don’t; and some times the creditor may just cause other problems within the bankruptcy. Stay tuned for more on this subject. I will tag these posts as “persistent creditors” to make them easy to find.

Elaine

Afraid to File Your Taxes?

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Trust me. I get it. Lots of us are afraid to file our tax returns – well, ok, afraid to prepare them may be closer to the truth; but, trust me, I get it.

– and it just got worse.

Not filing your taxes has always been bad. Filing late has always had some consequences, but most of them were manageable. Now, there is a new one.

In the last week of 2014 the 10th Circuit Court of Appeals handed down an opinion agreeing with an earlier decision from the 5th Circuit. So far, they are the only two circuits to hear this particular issue; and they agree. This is not good.

Here is the problem. Generally, speaking income taxes are dischargeable in a bankruptcy proceeding provided that they meet certain requirements. Like with anything involving either the Bankruptcy Code or the Tax Code (let alone both), there are more rules, limitations and exceptions to the basic rules than holes in Swiss cheese. Still, generally speaking, if the taxes meet certain age tests they are dischargeable in a bankruptcy filing – any chapter. Well, the 10th Circuit, following the 5th, has added a new wrinkle.

According to these Courts if the returns were filed so much as a day after they are due, the taxes on those returns are never dischargeable in a Bankrutpcy. Of course, if they are filed before the expiration of a properly granted extension, they are not late. If they are filed after the extension expires, however, or if no extension is granted; then, we have a whole new problem.

I have a case right now where a client has filed a bankruptcy, and taxes are a major part of the debt. I just went through every one of her tax transcripts. One of those returns was filed late. Anywhere inside the 5th or 10th Circuits the taxes on that return are not only not dischargeable in this Bankruptcy – they will never be eligible for a discharge. Oh, and the date on that return? Filed less than two weeks after April 15, and no request for extension was filed.

This seriously sucks.

Elaine

What If I Didn’t List Something. . . .

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First of all, there is a huge difference between failing to list an asset, like that mineral interest you inherited from your Grandparents, and failing to list a debt, like a car loan. Either one is perjury, if the omission was intentional; and either one can be grounds for a finding of bankruptcy fraud or even a denial of discharge if the facts are right. So, you really do need to put some time and effort into making sure that your Schedules include all of your assets and all of your debts.

So, what happens if you missed something? Assets are a whole different issue, I will touch on another time. Let’s talk about not listing a debt. It can be easy to forget an old medical bill or there can be debts you don’t even know about. Let’s say you had a car repossessed a few months before the bankruptcy filing. You scheduled the repossession on your Statement of Financial Affairs, but you didn’t list the Creditor; because you didn’t realize that you were still going to owe them money.

The creditor doesn’t get notice of the bankruptcy, and a year or two later the creditor sues you for the difference between what you owed at the time the car was repossessed and the amount they got for the car (after subtracting repo fees, sale fees, reconditioning fees, etc, etc., etc.). So, a year or two after your bankruptcy you are being sued for thousands of dollars. Now what?

That depends. The first issue is which chapter you filed under. This assumes that you filed a Chapter 7 bankruptcy. The analysis for a Chapter 13 is quite different. The second issue is whether or not your Bankruptcy was an asset case or a no-asset case. In other words, whether or not your Trustee managed to distribute any money out to your creditors. Most Chapter 7 Bankruptcies are no-asset cases. The biggest variable, believe it or not, is where you filed your Bankruptcy.

If you filed your Chapter 7 Bankruptcy in Oklahoma (and this blog is always restricted to Oklahoma issues, since that is the only State in which I am licensed to practice), and it was a no-asset case; you’re almost home free. As long as the failure to list the debt was truly unintentional and in good faith, your liability for that debt was included in your discharge. That does not mean, however, that you can sit back and do nothing. The creditor has incurred collection costs as the result of your failure to give them notice. So, you need to take action ASAP to let them know about the Bankruptcy. The best way to do this is to contact your Bankruptcy attorney and have them send a letter to the creditor’s collection attorney explaining the facts, providing information about the bankruptcy filing and providing information on the law in Oklahoma as to the inclusion of omitted debts in a no-asset discharge. You can expect to pay for that service, but in my opinion it is money well spent. The last thing that you want to do is wind up facing a wage garnishment that could have been avoided or find that you may have waived some rights by allowing the creditor to continue acting out of ignorance of your bankruptcy filing. Remember, you have a duty to give notice of the bankruptcy filing to everyone you owe money to. Failing to do so does not necessarily leave you at the creditor’s mercy; but that does not mean it is completely without ramifications.

Elaine

Private Student Loans Do Have Some Limits

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One of the nastier changes made to the Bankruptcy Code in 2005 was to make private student loans (i.e., not Federally insured) as non-dischargeable in a Bankruptcy as Federally insured student loans. That change did not, however, extend all student loan protections to private loans. So, private student loans are still subject to State law statutes of limitations.

A statute of limitation is the period of time within which a lawsuit must be brought or it may not be brought successfully. That statement is a little overly broad. In Oklahoma, although not in all States, a statute of limitation is an affirmative defense. That means that it must be raised by the defendant. If the defendant doesn’t raise it, the plaintiff can still win.

Anyway, back to the point. I got a call today from a woman who took out a private student loan some years ago. She filed a Chapter 7 Bankruptcy with another attorney in 2012. The student loan was obviously not discharged. She is now being sued on that loan by a local collection law firm. I checked the case on the Court’s online docket, and from the petition and attached documents I could tell that the first payment on the loan was due in May, 2009. No payments were made. The woman filed for Bankruptcy, and it was discharged 115 days later. If the bankruptcy did not toll the running of the statute, it ran last May. If it did, it ran 115 days later – sometime in September. The lawsuit was filed in December.

Unfortunately, it was in a different County. So, I have referred her to a lawyer closer to the action. Still, this one could be fun.

Elaine

How Long Before They Repo My Car?

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I get asked this question a lot, and the answer varies pretty widely depending on the facts. Most commonly, though, I am asked this question by someone who needs to file for Bankruptcy and has made the decision that he cannot afford to keep his car. In other words, the client is going to surrender his interest in the car to the car lender during the bankruptcy.

There are a number of options in a Chapter 7 Bankruptcy for dealing with secured debt (i.e., debt that is secured by a lien on a piece of property, like a car loan or a mortgage). One of them is to surrender the property to the lender. So, the question being asked is really – so, how does that surrender thing work and how long does it take anyway?

Well, that depends.

I’m a lawyer, you were expecting a definite answer?

When the bankruptcy is filed the Debtor files a Statement of Intent that states what he intends to do with his secured debt. So, in this case, the Debtor will indicate that he intends to surrender the vehicle. However, at the instant that the case is filed the Automatic Stay goes into effect, and that stays (or temporarily stops) all collection activity against the debtor or property of the debtor – including the car in this illustration. So, even though the Debtor is indicating his intention to surrender his car to the lender, the lender can’t take it; because taking it would be an effort to collect a debt, and that is prohibited by the Automatic Stay. Are we having fun yet? Thought so.

Now the ball is in the lender’s court. They can either wait until the Bankruptcy is over with and then repossess the vehicle., or they can file a Motion with the Bankruptcy Court asking the Court to lift the automatic stay and abandon any interest that the Bankruptcy estate might have in the vehicle. The creditor can do that as soon as he learns of the Bankruptcy filing or not until later. It isn’t uncommon for creditors to wait until after the First Meeting of Creditors, which is generally about 30 days post-petition, to file their motion. Given these facts, once that motion is filed, it will be granted in about 3 or 4 weeks – kind of depending on how excited the creditor’s lawyer is to get it done. The net effect of this motion being granted is the Bankruptcy Court gives the creditor permission to collect his debt against the property – not the debtor, just the property. The stay remains in effect as to the Debtor, and assuming that no objections to discharge are granted; the stay will be replaced by the discharge injunction at the conclusion of the Bankruptcy. The discharge will prohibit the car lender from EVER trying to collect money from the debtor again. The creditor is welcome to the car, because he has a lien on it; but that is all he gets.

After the creditor gets permission to repossess the car, and he will – eventually. Some creditors will have someone out looking for it the next day. Others take longer to get around to it. In my office I point out to my clients that they don’t want to be driving this car if a repo guy might be looking for it. Walking out of the grocery store with ten sacks of groceries including 2 gallons of ice cream and finding no car to put them in is not a situation most of my clients want to find themselves in. So, I will generally arrange for the debtor to deliver the car to the lender. Not everyone does it that way.

The long and the short of this is that even if you want to give the car back it will take just under a month or . . . longer, to do so. On the other hand, if the Debtor wants to keep the car as long as possible, that is a completely different analysis and one that is going to vary widely depending on the specific facts, the creditor involved and even the court in which the case is filed.

Elaine

Judgments, Judgment Liens and Bankruptcy

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Any discussion of judgments and judgment liens is by necessity State specific. These are creatures of State law, and State law varies widely with respect to both judgments and judgment liens. Bankruptcy is governed by Federal law, but the Bankruptcy Code defers to State law frequently, and that is true with respect to how the Bankruptcy Code interacts with judgments and liens. So, always be sure you understand the underlying State law before assuming you understand anything about judgments, judgment liens or how they are affected by a Bankruptcy.

A Judgment is the result of a lawsuit. In a collection case the judgment will specify the amount of money that the Defendant owes to the Plaintiff. A judgment creates a lien when it is recorded in County records and attaches to a piece of property. In Oklahoma judgment liens can only attach to real property (i.e., land). Tax liens (which arise by Statute rather than as the result of a lawsuit) can, and do, attach to anything owned by the Debtor. What a lien does is it gives the lienholder special rights to get paid from the proceeds if and when the property to which the lien is attached is sold.

Some liens can be foreclosed by the lien holder. Some liens cannot be. If the lien can be foreclosed, then the judgment creditor (or lien holder) can effectively force the sale of the property so that its lien can be satisfied from the sales proceeds. If a lien cannot be foreclosed, for instance, a judgment lien attached to the judgment debtor’s homestead; then, the lien holder can only sit back and hope that the debtor chooses to sell the property. At that point, assuming that the lien is still viable, the judgment creditor is entitled to be paid out of the sales proceeds.

A Bankruptcy filing does affects judgments and liens in a number of ways. First of all, if a lawsuit has been filed, but the judgment has not yet been entered; a Bankruptcy filing will stay the lawsuit and prohibit the entry of the judgment. If the judgment has already been taken but not yet recorded, the recording of the judgment will be stayed by the bankruptcy filing.

More generally, by the time the bankruptcy is filed the judgment has already been taken and recorded. At that point if the Debtor owns real estate in the County in which the judgment was recorded, then the judgment has created a lien on the real estate. If the Debtor does not own real estate in the County in which the judgment has been recorded, then no lien has been created. This is a point that countless title attorneys miss.

Once a judgment has been recorded on real estate it can be removed in a Bankruptcy if the real estate it is attached to is exempt, which generally means the debtor’s homestead; and if the lien impairs the homestead exemption. In most cases in Oklahoma a judgment lien will always impair the exemption if it is attached to a homestead. That is certainly not the case in other States, and there are exceptions in Oklahoma, especially if the Debtor used exemptions other than Oklahoma’s State law exemptions when filing the Bankruptcy.

That does not mean, however, that filing a Bankruptcy automatically removes judgment liens from your homestead. First, a motion to avoid the lien must be filed. The motion must be served on the judgment credtior, among others; and that motion must be granted. The vast majority of such motions are granted, and in many cases obtaining good service is the hardest part of the process. Still, if it isn’t done and the order doesn’t issue, then the motion will remain attached to the debtor’s homestead. Oh, and when this Order issues, make sure it is recorded in County records where future title attorneys can find it.

The first problem arises when this isn’t done, the bankruptcy is discharged, and the case closes. This generally happens, because either the Debtor didn’t tell the bankruptcy attorney about the judgment or didn’t pay for the additional work necessary to have the lien avoided. In this case, it is generally possible to reopen the Bankruptcy case to avoid the lien. This is substantially more expensive than doing it when the case is still open. It also gives the judgment creditor an extra argument that the motion to avoid should not be granted. However, these motions are still generally successful. The biggest problem here is that the home owner generally finds out about the judgment lien when trying to close a sale of the house. The time necessary to reopen the case, give notice to all creditors, have a trustee reappointed, file the motion, get proper service o the creditor, and get the order entered frequently means that the buyer has lost interest and moved on.

The other possible problem is that the title company’s title attorney doesn’t understand the effect of a Bankruptcy discharge. Yes, this is really a problem. Here is the most common scenario. A couple files for Bankruptcy. They do NOT own any real estate at the time. There are judgments against them, but they are not liens; because there is no real estate for them to attach to. The Debtors’ bankruptcy attorney correctly does not file motions to avoid the judgment liens, because you cannot avoid a lien that doesn’t exist. The case discharges and closes. Several years later the Debtors decide to buy a house. The title company won’t issue title insurance, because the judgment liens (that don’t exist) weren’t properly avoided in their Bankruptcy. In other words the title company basically tells these people that their bankruptcy lawyer screwed up and now they will never be able to buy a house, because these pre-bankruptcy judgments will attach to any real estate they buy – ever (or until the judgments expire).

I really hate getting these phone calls.

Ok. Here is the skinny. Section 524 of the United States Bankruptcy Code says:

(a) A discharge in a case under this title –

(1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section 727, 944, 1141, 1228, or 1328 of this title, whether or not discharge of such debt is waived;

That is pretty much the last word on this issue. Once a discharge is entered, and the debtor’s liability for the underlying debt is discharged; the judgment is VOID – not voidable, not weakened, not asleep. It is dead. Dead judgments cannot attach to after-acquired property.

Elaine