Tag Archives: fraud

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

How to Go to Jail for Filing Bankruptcy

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It doesn’t happen often, but about once a year I read about someone in this part of the Country going to jail for being stupid.  I’m sorry, I shouldn’t be rude about it; but there just isn’t much you can call smart about going to jail for Bankruptcy fraud.

The most recent fact scenario happened in Arkansas, but I have seen very similar facts several times in Oklahoma.  (Fortunately, none have been my clients.)  Here is how this particular story plays out.  Client has something he doesn’t want to lose.  Client also has a ton of debt.  The client is concerned (rightly or wrongly) that if he files for bankruptcy and owns this asset he wants to keep that the Trustee will take it away from him.  Maybe the client is right, and maybe he isn’t.

Where the client goes really, really wrong is the client decides that he is smarter than the system.  Instead of talking to a good, Bankruptcy lawyer about how to best protect this asset and still get relief from his debts, the client decides to transfer the asset to someone else and just say nothing.  The client is gambling that no one will ever be the wiser.  Maybe the transfer is even semi-legitimate.  Possibly the client transfers the asset to someone to whom he owes a significant debt, and maybe if that had been properly disclosed it would have been a viable pre-bankruptcy plan; but NOTHING is viable if it is concealed.

So, client goes to lawyer.  Lawyer asks client if he has sold or given away anything of value in the last two years that hasn’t already been discussed.  Client says, no, of course not.  Bankruptcy is filed with none checked on the question on the Statement of Financial Affairs regarding transfers.  Bankruptcy trustee appointed to administer the case finds a record of the asset in question — trust me, they have ways.

At this point nothing good is going to happen.  The Debtor MIGHT just lose his discharge — or he might go to prison.  It really depends on the facts.  The point here is that this is completely avoidable.

If you have an asset you really don’t want to lose, call a good, bankruptcy lawyer sooner rather than later.  Give yourself some time, because even if (and this is a big if) you would, in fact, lose that asset if you were to file for bankruptcy; there may be a legal and legitimate way to change that result.

Regardless, it isn’t worth going to prison over.  Talk to a lawyer.  Be honest and up front with the lawyer.  Sometimes they really do know the solution to that which scares you.

Elaine

They Said I Can’t Bankrupt That

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I get told this a lot. Someone calls and they have talked to a loan company, a debt collector, or the guy on the next bar stool at a local dive. What I hear is, “They said I can’t bankrupt that.” Well, of course not. Bankrupt is an adjective. To Bankrupt is not a verbal – of any kind. You can be described as bankrupt, but there is no such action as to bankrupt. The moral of this story is, of course, don’t take legal advice from anyone who speaks English this poorly. In fact, don’t take legal advise from non-lawyers – especially when they are trying to get you to pay them for a debt or if you aren’t sure just how many drinks they have already had.

Now, are there debts that cannot be discharged in a Bankruptcy? Sure, and some of them you will kind of know, and there are a few that will probably surprise you.  For instance, most people are pretty comfortable with the idea that you can’t discharge child support in a Bankruptcy.

However, most people probably don’t know that you can’t discharge a debt for willfully or recklessly failing to maintain the capital of a Federally insured financial institution. Don’t worry if you don’t understand what that means, it almost certainly doesn’t apply to you.

I will concede to being a bit silly (or snarky, your call) with that last example, but the fact is that there is a section of the Bankruptcy Code (11 U.S.C. §523) that lists all of the debts you cannot discharge (or get out of) in a Bankruptcy. In the copy of the Code I keep handy, that section is five pages long, and very little of those five pages apply to the vast majority of  people with more debt than they can pay.

In fact, no matter what you have heard about the 2005 Bankruptcy Reform Act there is no general exception from discharge for credit card debt. That’s right. Despite what that debt collector told you, absent certain general restrictions, a Bankruptcy filing will still discharge most, if not all, of your credit card debt – and your medical debt – and pay day loans – and even in many cases old income taxes. Really.

The exceptions to discharge that apply most commonly  are:

  • Child support;
  • Alimony;
  • Property division or other divorce related debt (in a Chapter 7 Bankruptcy);
  • Student loans;
  • Debt incurred by fraud or shortly before a Bankruptcy filing; and
  • Recent taxes (rules are complicated).

Embezzlement? Well, that is a problem. Lying on a loan application or borrowing money with someone else’s identity, forging loan documents, taking the vacation of your lifetime in Paris paid for by Visa with the intention of filing for Bankruptcy before those bills come due?  These are all at least as non-dischargeable as you should think they are.

All silliness aside, here is what you need to remember. Most people who file for bankruptcy can discharge all, or virtually all, of their debt. There is a five-page laundry list of debts that cannot be discharged in a Bankruptcy, and for the most part, none of them are simple; and most of them are not all that common. The odds are very good that no one other than an experienced bankruptcy attorney can discuss any of them with you in any detail. Most people know just enough to be dangerous about Section 523, and that includes a large number of lawyers who don’t practice bankruptcy law on a regular basis.

If you have any questions about whether or not a debt is dischargeable, ask a lawyer who practices in the Bankruptcy Courts regularly. If anyone else tells you that something is not dischargeable, take that advice with a large helping of salt – especially if they think Bankrupt is a verb.

Elaine

 

When Creditors Don’t Go Away — Part 1

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In most cases someone files for bankruptcy, he lists all of his creditors with their addresses, account numbers and at least an approximate amount owed; the creditors receive notice of the Bankruptcy, then they receive the discharge; and they go away.  The general rule is that the Debtor will not hear from any of his creditors again once the Bankruptcy is filed.  (This post only pertains to debts that may or may not be included in the discharge.  It does not apply to creditors who don’t comply with the Automatic Stay.)

There are exceptions.  First of all, there are certain debts that are automatically not included in a discharge.  That means that once the Bankruptcy is over the Debtor is still liable for the debt.  The most common examples are recent taxes, child support or alimony and student loans.  These, the debtor can expect to have to deal with once the discharge is entered and are not generally a surprise.

Then there are the others.  There are lots of reasons why a debt will be excepted from the discharge, and some of them aren’t as predictable as recent taxes.  The complete list included in the Bankruptcy Code (and there are a few other provisions elsewhere in Federal Statutes, but they are really rare) is found at 11 U.S.C. Section 523.

If you file for Bankruptcy and a creditor thinks that you have defrauded them, obtained money by embezzlement or false pretenses, or otherwise come within the scope of a Section 523 objection to discharge, then the creditor may decide to ask the Court to exclude this debt from your discharge.  The vehicle for doing this is what is called an Adversary Proceeding, which is essentially a separate lawsuit filed within the scope of the Bankruptcy filing.  Adversary Proceedings are actually quite rare, but they do happen.

This is what can happen when a creditor isn’t willing to go away and wants to try to establish that his debt should be excepted from the discharge.  First, the creditor may appear at your First Meeting of Creditors.  This is not required, but if the creditor is local or has local counsel, it is an easy way to start to feel out the case.  The First Meeting of Creditors exists for creditors and the Trustee to ask questions, and a creditor looking to build a case for an objection to discharge may use this as an opportunity to ask a few, basic questions.  If they want to ask very many questions, the Trustee will tell them to set a 2004 Examination.

A 2004 Exam is the next step, and again it is not mandatory.  A 2004 Examination is basically a deposition.  It is a meeting in a conference room that will be recorded one way or another, it will be under oath, and the creditor who requests the exam asks the Debtor (or other party) questions.  The debtor can be required to bring documents to the meeting, and it can generate a great deal of facts that the Creditor can use to build his case against the debtor.  A 2004 Exam must be authorized by the Court, and the Court has the authority to limit it in scope or duration.

Finally, the creditor must file an Adversary Proceeding (unless his debt is automatically excepted from discharge like child support or student loans).  An Adversary Proceeding is really just a lawsuit, but it is filed inside the Bankruptcy.  Once it is filed it will proceed like any other civil case, with discovery, motions, and it will finally culminate in a trial with witnesses and exhibits but no jury.  One of the important things to remember about an Adversary Proceeding is that it must be filed by a deadline that is set when the Bankruptcy is first filed.  That deadline can be extended, but it cannot be missed – unless the creditor didn’t get notice of the filing.  Yet one more reason why you must give your lawyer a complete list of everybody you owe money to with their addresses!

I cannot repeat strongly enough how rare most of these things really are.  Creditors are not going to spend good money to send someone to a First Meeting of Creditors just because they can.  Likewise, filing an Adversary Proceeding is a significant investment in time and money; and creditors don’t do that without good reason.  There are certain flags that your attorney will be watching for when he prepares your case that indicate an Adversary Proceeding may be likely.  If that is the case, he should go over that with you.  It is incredibly rare for an Adversary Proceeding to be filed that is a real surprise to the debtor and debtor’s counsel – assuming that the Debtor has been fully above board with his lawyer.  So talk openly and honestly with your lawyer, ask if there is a debt you are concerned about.  A big part of your attorney’s role is helping you to evaluate risk and putting you at ease when you are worrying about things that aren’t likely to be an issue.

Elaine

What if My Bankruptcy is Denied?

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I love questions like this.  My standard answer (if I am feeling obnoxious) is, “Well, I don’t know.  How would that happen?”  The standard response to that is, “Well, I don’t know.  You’re the lawyer.”

Yea, I’m the lawyer; and the fact is, it is possible to have a discharge denied — but that isn’t really the question.  The real question has nothing to do with the Bankruptcy Code and everything to do with the fear of feeling backed into a corner, surrounded and overwhelmed.  This is what I classify as a monster under the bed question, because no matter how old we get, we still have irrational fears that keep us up at night and vanish instantly when hit by the beam of a flashlight.  So, here’s my flashlight.

To be eligible to file for bankruptcy you must meet certain criteria.  The most well known of these is that to file a Chapter 7 Bankruptcy, you must pass the so-called Means Test.  You also must be insolvent; but there are three insolvency tests, and if you don’t meet at least one of them, you aren’t talking to a bankruptcy attorney.

Assuming that you are a human being (and not, say, a non-business trust) and you are not able to pay your bills as they come due, you are going to be eligible to file some chapter of Bankruptcy.  Which chapter may depend on other things, but you will talk to your attorney about those in detail — and this isn’t what people are afraid of.

For most people this really is a monster under the bed fear.  What if the Court just says “NO!  Not YOU!  Anybody else, ok; but not YOU!”  Doesn’t happen that way.  If you are eligible to file, you are eligible to file.

The snag with answering this question is that it is possible to file a bankruptcy successfully and have your discharge denied at the end.  Those are truly extraordinary cases (and not in a good way).  In my 22 years of practicing law, I have never had a client had his discharge denied.  It is a great big, bad thing that doesn’t happen easily.

So, what does that mean?  First of all, it is fairly common for certain debts to be excepted from the discharge.  This is not the same as a denial of discharge.  Most people know that recent taxes, child support and student loans aren’t going away just because they filed for bankruptcy — and they are generally right.  However, if you incur a debt with the expectation of discharging it in bankruptcy (that is called fraud), and the creditor complains about it to the Bankruptcy Court (by filing something called an Adversary Proceeding) and wins; then, that particular debt will be excepted from the discharge, and the Debtor will still have to pay it.

I can hear the chorus now, “But, I’m a good person.  I didn’t plan this.  This debt is all years old, and if I hadn’t lost my job/gotten divorced/ or gotten sick I wouldn’t be here.  Well, then you shouldn’t have to worry about this.  Again, the real fear is that the world won’t see you for who you really are; but only through this stigma of bankruptcy.

Still, this isn’t really what my clients are afraid of.  They aren’t afraid of having to pay their child support or that one credit card that they used right before they filed (knowing good and well they were filing and that they would still have to pay it).

No, my clients are afraid of filing the Bankruptcy and just being told NO.  Go away.  You aren’t good enough, and that doesn’t happen — well, not exactly.

What can happen is a Debtor can get caught hiding assets, not telling the truth, concealing income, not disclosing things he doesn’t want the Trustee to know about.  BOOM!  Thou shalt NOT lie, cheat or steal in connection with a bankruptcy.  Don’t even go there.  That means if you have a nonexempt asset you don’t want the Trustee to administer, well, talk to your lawyer about your legal options.  Just deciding not to disclose it (i.e., Oh, I don’t want to list that) is not a valid response to your lawyer.  Not only will that cost you far more than honesty up front, it can cost you your discharge.  It can also cost you a criminal prosecution and an all-expense paid vacation to a Federal minimum security “camp”.  Don’t go there, because I promise you, your lawyer has no intention of sharing your jail cell.

So, be the person you know yourself to be — honest, above board and cooperative.  A Debtor has a duty to disclose all assets, expenses, debts, liabilities and financial transactions.  Keep your records.  Produce anything requested of you.  If the Trustee wants to see something, hand it over WITH A SMILE.

The name of the Bankruptcy game is disclosure.  It is the ultimate flashlight, and the world is a lot less scary in the light.

Elaine

First Meetings of Creditors — the Questions

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The First Meeting of Creditors, or 341 hearing, exists so that the Trustee assigned to administer the case  can make sure he understands the schedules, identify any non-exempt assets he needs to administer and ask the Debtor any questions he needs answered.  Also, any creditors who need to know something (like car lenders who want to know if the Debtor is going to keep a car and verify that it is insured) or someone who believes he has been defrauded and needs a chance to ask a few questions to decide whether or not to pursue an objection to discharge have the right to ask questions as well.  These are the people for whom this hearing exists, but for most clients, it is a non-event.

Once you have been sworn in, you will take a seat to the Trustee’s left, and your lawyer will stand opposite you behind a podium.  Your lawyer will then begin asking you incredibly difficult questions — like your Name.  (You might want to study.)  Your lawyer should go over with you exactly what he will ask before the hearing, but the questions don’t generally get much harder than that first one.

Then, the Trustee has the right to ask you questions if he wants to.   He may ask some basic questions to make sure that he understands everything.  Again, not really much harder than that, “Please state your full name for the record” bit; and your lawyer should give you a pretty good idea of what kinds of things about your case will catch the Trustee’s eye.

After that, any creditors present have the right to ask you questions and so does the U.S. Trustee’s office if they want to.  The U.S. Trustee’s office is generally interested in asking questions about the Means Test, any budget entries that look excessive or anything that might smell like fraud or abuse.

It is that whole idea that their creditors are going to ask them questions that I think really scares my clients.  Look at it this way.   No one is going to pay a representative to drive to the Courthouse and cool his heels through the first part of the docket without a good reason.   Car lenders may want to know if you are going to keep the car and if it is insured.  That makes sense.  They need to know that.

For most of my clients from the time their case is called by the Trustee until they are heading out the door is less than five minutes.

Now, there are exceptions.  Business cases or other cases with significant assets and large  dollar figures involved will take more time.  For one thing, they are more complicated and there is more to understand.  For another, the bigger the dollar figures and the more things going on the greater the opportunity to conceal funds or otherwise commit fraud.

Of course, people who kind of, sort of, forgot to tell their lawyers about the rent house they own in another County or oil and gas rights in Texas  are generally in for an unpleasant surprise.  People who filed Bankruptcy leaving a number of people feeling like they were defrauded or just a ticked off ex-spouse will frequently prefer a root canal without anesthesia.  Clients whose lawyers either didn’t do their jobs or didn’t know their jobs are generally not in for a brief or pleasant time.  Anyone who thought that not mentioning something to his lawyer was a good idea is in for an eduction.  These are generally people for whom the 341 is not pleasant.

That last paragraph was a little smug and isn’t completely true.  There can be plenty of good, honest people who are well represented whose 341’s aren’t fun.  Construction contractors who left a bunch of houses unfinished and bills unpaid will frequently find homeowners showing up to either lay the groundwork for an objection to discharge or just to regain a pound of flesh.  Ex-spouses can be unpleasant additions to a 341 room.

Ask your lawyer if anyone is likely to show up on your case.  Basically, non-institutional creditors (normal people instead of Capital One) are likely to show up just because they got something in the mail and don’t know that they don’t have to.

If your lawyer tells you that you have nothing to worry about, then take a book.  Otherwise, you will leave shaking your head over some poor sod who went before you and didn’t have a good day.  I will post a few of those stories another time.

Elaine

First Meetings of Creditors — the Background

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For most of my clients the First Meeting of Creditors (known familiarly as the 341 hearing) is the only time they have to go to the Bankruptcy Court.   I warn them that it is likely to be the biggest non-event they have ever lost sleep over.  That doesn’t help.  They are almost always  scared to death.

I have to confess that I understand.  Some twenty years ago when  I was a baby lawyer (maybe even still in law school),  I was sent to a Chapter 11 341 to observe.  I was not to ask questions.  I was not to enter an appearance.  I was to observe, take notes and report back.

I was scared to death.  I try to remember this when I look at my clients in the hallway of the courthouse shaking in their shoes.  So, just for the record, this is what a consumer debtor in the Western District of Oklahoma has to look forward to.

First,  airport level security at the door of the Courthouse, and don’t even think about bringing your cell phone into the building with you.  Second, a  crowded room filled with other people who have filed for Bankruptcy, their lawyers and a few creditor representatives.  Third, (unless you are at the top of the docket) — boredom.   Bring a book.

When your case is called you and your attorney will go to the front of the room.  The first thing you will do is give to the Trustee presiding over the docket (no, he is not a Judge) your Government issued photo ID (like a driver’s license) and proof of your full Social Security Number.  He will then verify that you are in fact who you claim to be.  You see how difficult this is?  (Believe it or not identity theft does occasionally turn up in the Bankruptcy system.)

Then, you will give to the Trustee, or the Trustee’s assistant, the documents you were told to bring to the meeting.  Generally, in this District those documents are:

  • Car Titles to all vehicles in which you have an interest;
  • Current month’s pay stubs;
  • Three months’ bank statements for all accounts (the one showing the date the bankruptcy was filed and the two before that).

Your Attorney should have already provided your two most recent tax returns to the Trustee’s office.

Then, of course, you proceed to the purpose of the meeting — the questions.  This post was getting far too long, so those will be covered in a separate post.

Elaine