BAPCPA – Page 5 – Rochester Bankruptcy and Debt Relief

Bankruptcy, Bad Checks, Discharge and Criminal Liability

A bad check, hot check, NSF check, returned check, rubber check, worthless check, or whatever you want to call it, is a check which the bank will not pay because there is either no such checking account or insufficient funds in the account to pay the check. In Texas, writing a bad check is a misdemeanor or can be a felony depending on the amount of the bad check and the circumstances of the issuance of the check. No matter how nominal you think the check is, you can still get you charged with a crime. If you file for bankruptcy and have hot checks outstanding it might make your bankruptcy case a bit more complicated. For the most part, bad check debt is dischargeable in bankruptcy, but since each case is unique, you should obtain legal advice on your bad checks before filing bankruptcy.

If you live in Houston, Austin, San Antonio, Dallas, or anywhere in the State of Texas and need to file for bankruptcy & have bad checks, contact the Texas Bankruptcy Attorneys at The Law Offices Of R.J.Atkinson for a free initial consultation to determine the best option to deal with your bad checks in bankruptcy.

Keep in mind that every bad check and bankruptcy situation is different, so it is important to obtain legal advice for your particular case. The following are some frequently asked questions about bankruptcy and bad checks.

1. If I file for Bankruptcy, will it stop “Prosecution for my Bad Check?”

No. If the prosecution is by a District Attorney, Attorney General, or any law enforcement authority of the State for a criminal action, then it will not stop prosecution for a bad check. When you file a bankruptcy case, there is a stay against any attempts to collect a debt from you which extends to creditors holding or collecting on Bad Checks, Hot Checks, Dishonored Checks, NSF Checks, Bounced Checks, Worthless Checks, Rubber Checks, or whatever you choose to call them.

When a bankruptcy petition is filed, Bankruptcy Law imposes “the automatic stay” which is an injunction on all collection actions and which prohibit further collection efforts on debts that came about prior to the bankruptcy filing. This “automatic stay” is one of the primary reasons many people file for bankruptcy. Although the “automatic stay” is a very powerful part of Federal Bankruptcy Law, the “automatic stay” does not extend to proceedings by the State or any Federal governmental agency pursuant to its police powers. More specifically, any criminal prosecutions which enforce criminal laws are not subject to the automatic stay of bankruptcy. The Bankruptcy Court treats prosecutions of bad checks as criminal proceedings and not attempts to collect debt as long as the actual purpose of a bad check prosecution is to enforce criminal bad check laws. Since a bad check prosecution isn’t meant to pressure the debtor into paying a debt that could otherwise be discharged in a bankruptcy the automatic stay of bankruptcy will have no effect on bad check prosecutions which enforce criminal law.

2. I have written postdated checks to several payday loan companies over the last year. I have to file for Bankruptcy; can they come after me criminally for the “Bad Checks” or sue me?

No. The payday loan company doesn’t have the authority to charge you with a crime. Only the District attorney, Attorney General, or the State or any Federal governmental agency with police powers can charge you criminally. They can however, make a recommendation to the District attorney, Attorney General, or governmental agency with police powers that criminal charges should be brought against you. Whether or not that happens depends on the particular facts of your case. As for filing suit, they could file a lawsuit against you in the Bankruptcy Court as an “adversary proceeding” if the want to attempt to lift the stay. They would have to file a special motion in the bankruptcy Court to lift the “automatic stay”. In thousands of cases, this law firm has never seen this happen. Whether they file suit this way will depend on the facts of the case, I.E. how much is owed, how they are treated in your bankruptcy, when you wrote the checks, etc…

3. I wrote a postdated check to a payday loan company, if I file bankruptcy can they still deposit the check after I file?

Yes, but if they deposit the check after they receive notice of the bankruptcy filing, it could be construed as a violation of the automatic stay. It’s not uncommon for checks to be processed after a bankruptcy filing. Many auto drafts and other similar ACH debits can still go through if the money is there. You should address your bank accounts accordingly, and if you do file for bankruptcy, it’s important that all of your creditors receive proper notice of the filing. Despite the fact that the automatic stay stops collection actions, your bank account can still be debited and outstanding checks can still go through if creditors aren’t properly noticed. Although you may get the money back at some point if the creditor wrongfully takes the money from you, it will still take some time. Whenever you post date a check you are in essence representing that the check will be good on that date. If you write a post dated check to a payday loan company or anyone for that matter, and then later file for bankruptcy, it will ultimately end up in the bankruptcy court if that debt is included in the bankruptcy.

The bankruptcy court will have to sort through the facts and then consider whether there was an agreement between you and the payday loan company or other party to hold the postdated check. The bankruptcy court will also consider other factors, but primarily, whether or not you ever intended to pay on the postdated check. Obviously if the day or weeks before filing bankruptcy you went on a check writing spree to payday loan companies, knowing that there were no funds in your account and that you would be filing for bankruptcy, then the bankruptcy court could get the impression that you never “intended” to make good on the checks. Generally, it all comes down to intent and representation. If your intent was to make good on a postdated check when you issued it, then it may be difficult for a payday loan company to prove you never intended to pay. This is especially true if you previously had an ongoing relationship, or have gotten caught up in the payday loan cycle for the months or years preceding a bankruptcy filing. The whole payday loan business is predicated on postdated checks, so they have the burden as potential creditors in your bankruptcy case to prove your intent. As for representation, if you misrepresent or fraudulently make statements to induce a party to accept your postdated check, then you could have problems discharging the debt in bankruptcy. Everyone’s situation is unique so it is always good advice to seek competent legal counsel.

4. If I file for Bankruptcy, can I discharge the debts owed for bad checks?

It depends. Every case is different, so the facts of each case will dictate if a bad check will be treated as dischargeable or nondischargeable. Generally, so long as there wasn’t any fraud, false pretenses, or material misrepresentations made or conveyed in the actual writing of the check or checks, then the “debt” component from the bad check(s) is quite often dischargeable. That being stated, going on a bad check writing spree days or weeks before filing for bankruptcy filing could make it difficult to discharge such debt.

The Bankruptcy Code doesn’t allow you discharge and debts incurred or obtained by fraud, misrepresentation, or false pretenses. Where Bad Checks, Hot Checks, Dishonored Checks, NSF Checks, or Bounced Checks are concerned, it depends on the circumstances. Obviously if, for example, you had been doing business with a payday loan company for the 6 months prior to bankruptcy and you didn’t have money in your account for 3 months, then wrote a check for $1000.00, and filed bankruptcy the next week, it would be tough to prove that your actions weren’t fraudulent. Therefore, when an irate creditor comes to bankruptcy court in a chapter 7, 13 or 11 case where the creditor is holding the check issued by the debtor that was dishonored, the expectation may be that the debt is not dischargeable. Unfortunately, debt based on a bad check is not automatically and not even usually held to be non-dischargeable.

To succeed in getting a bankruptcy court to find a bad check debt is non-dischargeable, the creditor has the burden of proof to show fraud or false representation by the debtor.

5. How will the Bankruptcy Court decide if the Bad Checks I include in a Bankruptcy will be discharged?

Since every situation is different, there is no way to determine what the Bankruptcy Court will do to interpret the facts of any issue. However, Bankruptcy Courts have examined various things in prior cases to determine whether a bad check is dischargeable or not. Some of the things the Bankruptcy Courts have examined to determine bad check dischargeability are as follows:

Whether there was an agreement to hold a post-dated check.

The time between delivery of the check and the bankruptcy filing.

Did the person issuing the check obtain legal advice from an attorney about bankruptcy before writing the check.

How many bad checks were written and included in the bankruptcy.

The amount or amounts of the bad checks.

The debtor’s financial condition at delivery of the check.

Whether multiple checks were delivered the same day

Whether the person filing was employed when the bad check was written.

Whether the check was written on a closed account.

The financial sophistication of the debtor.

Whether life necessities or luxury items were purchased.

6. I wrote a hot check for $35.00 to the convenience store. Can they do anything if I file bankruptcy?

Sure they can. They can contact the district attorney and file a criminal complaint against you. However, having handled almost two thousand cases, my clients have rarely had problems with bad checks less than $300. That’s probably due to the length of time and hassle involved with pursuing criminal charges, especially when the person who wrote the bad check just filed bankruptcy. I have seen very angry holders of bad checks occasionally show up at creditors meetings and have received calls from a few district attorneys in other states wanting to work out a payment plans, but not for nominal amounts. Since writing a bad check in any amount is a crime, I advise all on my bankruptcy clients to pay anyone who may be holding a bad check.

7. I have to file Chapter 13 Bankruptcy to stop foreclosure, but I have about $1000.00 in hot checks out. Can I repay the checks in my bankruptcy and avoid criminal charges?

There is no way to know for sure. It may be possible to include repayment for the hot checks in your Chapter 13 Bankruptcy but its up to the district attorney as to whether you will be charged with a crime whether you include it in a Chapter 13 plan or not.

When you file bankruptcy, your creditors, which include any parties holding a bad check, are prevented from taking any attempts to collect from you. The Automatic Stay of bankruptcy automatically stops most legal actions against you, but filing bankruptcy will not stop criminal prosecutions against you. So, if you have written bad checks, the party to whom you wrote a bad check to could request to have you arrested and criminally prosecuted for a bad check. When a person who has written a Bad Check files for bankruptcy under any chapter under the Bankruptcy Code, it will not protect them from criminal prosecution and will not discharge their criminal liability for any restitution, costs and fines associated with the criminal prosecution & restitution.

At The Law Offices Of R.J.Atkinson we generally recommend that if at all possible you should attempt make bad checks good prior to your filing for Bankruptcy in order to avoid criminal prosecution on the checks. It isn’t always possible to take care of a Bad Check prior to filing for Bankruptcy since you may be facing a foreclosure, repossession, or other urgent motivating factor, but when the only option is to file Bankruptcy before taking care of a Bad Check, you should be aware that filing for bankruptcy will not stop criminal prosecution for a Bad Check.

If you have bad checks, hot checks, rubber checks, NSF checks, bounced checks, dishonored checks, or worthless checks and live in Houston, Austin, San Antonio, Dallas, or anywhere in the State of Texas and need to file for bankruptcy, contact the Texas Bankruptcy Attorneys at The Law Offices Of R.J.Atkinson for a free initial consultation. We may be able to help you with the bad checks before you file for bankruptcy and can help you determine how to deal with your bad checks in bankruptcy if the Texas Bankruptcy Means Test provides you are eligible to file.

What happens if prior to filing for bankruptcy, the debtor gives a bad check to someone? A bad check, Not Sufficient Funds check, or a bounced check, is usually a check which the bank will not pay because there is either no such checking account or there are insufficient funds in the account to pay the check. In New York, writing a bad check is a misdemeanor, punishable up to 90 days in jail for the first offense. To be charged criminally for issuing a bad check usually means that the check was issued with knowledge that it would not be paid by the bank. If you file for bankruptcy and have bad checks outstanding it might make your bankruptcy case more complicated. For the most part, bad check debts are dischargeable in bankruptcy, but each case is unique.

Sometimes, while the debt may be listed in the bankruptcy petition, the debtor may be charged criminally. The bankruptcy filing, and the automatic stay associated with it, will not stop a criminal prosecution. The automatic stay prevents any attempts to collect a debt from you which extends to creditors holding or collecting on that check. Although the automatic stay blocks all collection actions by the creditors, it does not extend to proceedings by the State or any Federal governmental agency pursuant to its police powers. More specifically, any criminal prosecutions which enforce criminal laws are not subject to the automatic stay of bankruptcy. The Bankruptcy Court treats prosecutions of bad checks as criminal proceedings and not attempts to collect debt as long as the actual purpose of a bad check prosecution is to enforce criminal bad check laws. Since a bad check prosecution isn’t meant to pressure the debtor into paying a debt that could otherwise be discharged in a bankruptcy the automatic stay of bankruptcy will have no effect on bad check prosecutions which enforce criminal law. If the debtor is found guilty of a crime of passing a bad check, the debtor may be liable for civil restitution, which is not likely to be found dischargeable by the bankruptcy court.

If no criminal charges are filed, the situation becomes clearer. The debt associated with a bad check is likely to be dischargeable, but its dischargeability will depend on whether there was any fraud, false pretenses, or material misrepresentations made in the actual writing of the check. If there was no fraud or misrepresentations involved, then the debt from the bad check is usually dischargeable.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Chapter 7 and Chapter 13 Bankruptcy, Recent Move by the Debtor and Applicable State Exemptions

Periodically, I see debtors who have moved recently to Rochester, New York, or nearby, from another state who wish to file either Chapter 7 Bankruptcy or Chapter 13 bankruptcy. The critical issue in those situations is to determine what state’s bankruptcy exemption laws, if any, will apply.

Under BAPCPA, which passed in 2005, the initial question is how long the debtor has resided in the present state of residence. If the debtor has lived in the same state for the two years prior to filing, then New York’s exemptions will apply. However, if the debtor has moved to New York from another state during the prior two years, then the following rules will apply.

If the debtor resided in the same state for at least 730 calendar days continuously (two years) prior to the filing of the bankruptcy petition, then the debtor can use that state’s exemptions. If the debtor did not live in the current state continuously for at least 730 days, then the debtor must pick the state in which he lived most of the time during the 180 days prior to the 730 days. In other words, the state that must be selected is where the debtor lived most of the time between 2 and 2 ½ years before filing.

If no state qualifies using the above rules (i.e., the debtor has lived in abroad) or if the 180-day state requires current residency or being a domiciliary to use its exemptions, then the debtor must use the federal exemptions. The default rule will only apply if the debtor did not live in any state during the 180 day period that began 730 days before filing, or if the state requires current residency or domiciliary. Under some circumstances, it is advantageous to the debtor to use the federal exemptions since they are typically more generous than New York’s exemptions.

Can You File Chapter 7 Bankruptcy If Your Income Exceeds Median Family Income?

In these uncertain economic times, I am getting this question more and more from people considering filing for bankruptcy all over Western New York. So can someone in Rochester making more than $75,000 file for Chapter 7 bankruptcy? The answer to that question is likely to be yes.

I have previously written about the means test component of the Chapter 7 bankruptcy. Under BAPCPA, the means test and its income standards were designed to be a bright line dividing those that were able to file Chapter 7 bankruptcy from those who were forced to file Chapter 13 bankruptcy. But the means test is more complicated than that, and the sheer median family income numbers alone are not alone dispositive, as discussed below.

The first Chapter 7 bankruptcy test the debtor has to pass in New York in order to qualify, is the Median Family Income test. It is the test that most debtors have heard about. Most debtors have heard about it from friends or relatives who filed for bankruptcy, usually along the lines “If you make over a certain amount, you can’t file.” Like most things you hear, these statements are only partially correct. The current Median Income limit in New York for a family size of one is $46,485. For a family size of two, the amount is about $58,109.

So how can someone filing for bankruptcy in Rochester who earns over $75,000 possibly file for bankruptcy in New York? The short answer is that BAPCPA, the bankruptcy law that was passed in 2005, allows you to take certain deductions when determining if you are qualified to file Chapter 7 bankruptcy. You can take standard IRS deductions that your bankruptcy lawyer knows about. You can deduct certain childcare expenses. You can deduct taxes that are being garnished from your wages. You can deduct your actual mortgage payments. You can deduct vehicle ownership expenses. You can deduct health care expenses. You can deduct food expenses. In other words, if you’re earning more than that median income test, you still absolutely have a possibility for filing for Chapter 7 Bankruptcy in Western New York.

While most of the deductions are technical in nature and require analysis of the debtor’s expenses and needs, I would recommend you speak with a Rochester bankruptcy lawyer and that lawyer will sit down with you and explain how the bankruptcy law requirements apply to you. This is what makes a difference to the debtors since a bankruptcy attorney can help someone in difficult financially situations. When meeting with the bankruptcy attorney, the debtor should discuss the full extent of his/her financial situation and when finished, should understand what course to take.

If you are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a bankruptcy lawyer.

Can Trustee Search Your Residence in Chapter 7 or Chapter 13 Bankruptcy?

A question that I commonly hear from debtors in Chapter 7 and Chapter 13 bankruptcies in Rochester or surrounding counties, is whether when they file for bankruptcy, someone will come to their house or apartment, and search or remove their assets. My typical response is to reassure them by telling them that in my experience, any such visits are extremely rare, and would only serve to verify the accuracy of their bankruptcy petition and other disclosure provided during their bankruptcy case. At the same time, as a bankruptcy lawyer, any such statements makes me concerned, since whether or not someone will actually come to search your house or apartment if you file for Chapter 7 or Chapter 13 bankruptcy, the petition, schedules and statement of financial affairs must to be completed truthfully and accurately. Any attempt by the debtor to conceal assets, or any dishonest statements in the bankruptcy petition or other information provided during the bankruptcy, if caught, are likely to result in a referral to the U.S. Attorney Office for criminal prosecution. There are currently individuals serving time in federal penitentiary who have been convicted of bankruptcy crimes, including those whose bankruptcy crimes cases were prosecuted in Rochester. In addition, the financial consequences of the dismissal of the bankruptcy case, and denial of discharge, can be significant, even if there is no criminal prosecution.

With respect to obtaining access to the debtor’s house or apartment, the bankruptcy trustee has the ability to obtain an order authorizing him or her to search the debtor’s house or apartment, with the assistance of the United States Marshall, and to break doors, locks and safes during the course of an investigation. Usually such order will be obtained on an ex parte basis — meaning without prior notice to the debtor to prevent him or her from hiding the assets.

As I have written before, when you file Chapter 7 bankruptcy, you receive the benefit of bankruptcy exemptions. For most debtors, the exemptions allow them to keep most, if not all, of the property they own. While each case is fact specific, and depends of the property owned and its value, a bankruptcy lawyer will be able to engage in pre-bankruptcy exemption planning to maximize available exemptions, and to minimize the assets that would have to be turned over to the trustee if their value exceeds permissible exemptions.

Therefore, the bankruptcy petition, and all of the schedules and other documents provided to the bankruptcy court, should be prepared truthfully and completely, while understanding that the trustee in your bankruptcy case has the ability to get a court order authorizing him to verify the accuracy of your petition. If the debtor provided truthful and accurate disclosure, he or she has nothing to fear. As a bankruptcy attorney, I work closely with all of my clients to make sure that they understand their obligations as debtors, but also to make sure they get to keep as much property as they are legally allowed.

“Pond” Motion and Avoiding Second Mortgage Lien in Chapter 13 Bankruptcy

In Chapter 13 bankruptcies, it is not uncommon to see situations where the debtor, who owns a home, has both a first and a second mortgage, or even a third mortgage on that home. In today’s real estate market, it is not uncommon for those mortgages to exceed the value of the home by a significant amount. Since the secured debt must be paid in full in Chapter 13 bankruptcy, does it make sense for the debtor to greatly overpay the value of that home? The bankruptcy law offers us a solution for those situations. Debtor’s bankrutcy lawyer can bring a “Pond” motion. The motion is named after a decision, In re Pond, 252 F.3d 122 (2nd Cir. 2001).

A Pond motion is a motion made in a chapter 13 Bankruptcy case where the debtor owns and lives (as his or her primary residence) in a residence which has a second mortgage and the value of the house is less than the amount owed on the first mortgage, as of the date the debtor files his or her Chapter 13 bankruptcy petition. If the motion is successful, the second mortgage will be treated as unsecured debt, removing its secured status. As a result, the amount owed to the second mortgage company gets treated like any other unsecured debt, and paid, in most Chapter 13 bankruptcies, pro rata. If the debtor is paying 50% of his unsecured debt through the Chapter 13 plan, it means that the amount paid on the second mortgage will be 50% of the amount owed. Once the debtor obtains his or her discharge the remainder of the second mortgage debt is no longer owed.

Here in Rochester, Judge Ninfo has written a number of decisions addressing Pond motions. One critical issue associated with Pond motions is valuation of the real estate. In In re Dzenziel, the central issue presented to the court was whether the valuation of the property would make the second mortgage unsecured.

The debtors brought their Pond motion, alleging that their residence had a value of $99,047, and the balance due on the first mortgage was $99,813.97 as of their most recent mortgage statement. Since the balance due on the first mortgage exceeded the value of the residence, the debtors asserted that the second mortgage was totally unsecured on the date they filed their Chapter 13 petition. Because the second mortgagor disputed the debtor’s valuation of the property, the court conducted a trial on the Pond motion.

Testimony at trial indicated that the debtors originally purchased the property for $101,000 when the property had been appraised at $111,000. The debtors reported that when they obtained the second mortgage in 1999, the property had been appraised at $180,000. The competing real estate appraisers testified respectively that the value of the property was either between $97,808 and $100,285 (adjusted to $99,047), or $120,000.

Analyzing the Pond decision, Judge Ninfo wrote, “If there is no equity in a debtor’s residence after accounting for other encumbrances that have priority over a mortgage lien, so that the mortgage lien is not even partially secured, the lien can be avoided and the mortgage debt treated as unsecured.” The court further stated that the burden falls upon the debtor to demonstrate that there is not even $1 of value over prior valid liens to support the mortgage lien that is to be avoided. The court also held that the debtor’s burden of proof is higher when “it appears that there was equity available for the mortgage … at the time it was executed; the alleged value deficiency may have been created in part because of a debtor’s failure to make payments on superior mortgages… and [if] the alleged value deficiency is not substantial….”
Reviewing the evidence presented, the court determined that the property has a value of at least $100,000, which does exceed the balance due on the first mortgage, and based upon relevant testimony, the property probably has a value between $120,000 to $145,000. Judge Ninfo concluded that the debtors have not met their burden to demonstrate that there is no value over prior liens that would enable the court to avoid the second mortgage and denied the motion.

The above demonstrates that valuation of property is critical in those situations where the debtor has an opportunity to convert second mortgage to unsecured debt. The bankruptcy lawyer would do well to use a reputable real estate appraiser and be prepared to conduct a hearing to substantiate the property’s value.

Refiling Chapter 13 Bankruptcy After Dismissal

As I have previously written, Chapter 13 bankruptcies involve many different issues. Once thing that bankruptcy lawyers point out to all debtors entering Chapter 13 bankruptcy is that the debtor has to make payments to the trustee, prior to the confirmation of the plan, and, of course, after the plan is confirmed. Sometimes, the debtor is unable to make payments, and, rather than asking his/her bankruptcy attorney to seek modification of the plan, does nothing. Under those circumstances, the Chapter 13 bankruptcy trustee will move to have the bankruptcy dismissed. Once the motion to dismiss is granted, and creditors resume collections activities, such as foreclosure, can the debtor refile?

The debtor can refile Chapter 13 bankruptcy, if it has been dismissed, at any time. However, changes to the Bankruptcy Code that were in Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) can limit the relief that the debtor receives when he/she refiles. If the Chapter 13 bankruptcy is refiled within one year of the dismissal, the automatic stay is in effect only for 30 days. This is a critical difference between a refiled Chapter 13 bankruptcy and the original filing. It means that within 30 days of the filing, the debtor’s attorney must file a motion in bankruptcy court seeking to extend the automatic stay. If the motion is not made, or granted by the bankruptcy court, creditors can resume collection activity.

In general, before a motion to dismiss is filed, or granted, the debtor should contact his/her bankruptcy lawyer to discuss all available options, including converting Chapter 13 to Chapter 7 bankruptcy, or amending the plan.

Converting From Chapter 13 to Chapter 7 Bankruptcy

While debtors who file Chapter 13 to protect certain assets are usually diligent in making their payments, sometimes the circumstances have a way of interfering with their ability to meet the plan’s requirements. It is possible that the debtor loses his/her job, missed a few payments, and creditors lifted stay, or the debtor decided that the assets were not worth preserving. One option that is always available in Chapter 13 is to dismiss the case, which the debtor has a right to do at any time in a Chapter 13. But this may leave you with credit card or other debt, or you may be worried that the house or car will be sold at foreclosure or repossession, or that the lender will go after you for a deficiency. In these cases, the best option is to covert your case to a Chapter 7.

In those situations, the debtor may still seek relief from the bankruptcy court, and convert the case from Chapter 13 to Chapter 7 bankruptcy, provided that the means test can be met. When converting the case from a Chapter 13 to a Chapter 7, there is still some paperwork that needs to be taken care of. The petition and schedules need to be updated with respect to the property, whether or not it is kept by the debtor. With respect to any property securing the debt, arrangements must be made with the creditor in order to keep it.

Schedules I and J for your income and budget along with the Means Test have to be updated to reflect that you no longer have the money to make payments in a Chapter 13 case . Once all of the paperwork has been revised, then the debtor must sign the amended schedules, so that they can be filed with the court.

Once the attorney files a Notice of Conversion with the Court and pays the $25 conversion fee, the Court will convert your case to a Chapter 7. There are also other consequences associated with the conversion. Initially, any money that the Chapter 13 Trustee is holding, less any administrative fees that the Trustee is due, will be returned to to the debtor. Any plan payments that are withheld from the debtor’s paycheck will be returned as well. A new Chapter 7 Trustee will be appointed and a new 341 hearing (meeting of the creditors) will be held. The debtor will also have to file a Statement of Intention with respect to any assets subject to creditors’ claims, and also file amended schedules listing any additional debt incurred between the filing of the Chapter 13 and the date of conversion.

Chapter 7 Bankruptcy and Denial of Discharge for Willful or Malicious Injury

One of the limitations on receiving a discharge in a Chapter 7 bankruptcy is that the debtor cannot discharge any debt for willful or malicious injury.

Section 523(a)(6) of the Bankruptcy Code precludes the discharge of a debt “for willful and malicious injury.” As noted by the United States Supreme Court in Kawaahua v. Geiger, 523 U.S. 57, 61 (1998), the “word ‘willful’ in (a)(6) modifies the word ‘injury,’ indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” For the same reason, nondischargeability under this section will attach only to injuries that are malicious. In the Second Circuit, the Court of Appeals set the standard for “willful and malicious injury” in its decision in Navistar Financial Corp. v. Stelluti (In re Stelluti), 94 F.3d 84 (1996). The Court concluded that “[t]he term ‘willful’ in this context means ‘deliberate or intentional,’” and that “[t]he term ‘malicious’ means wrongful and without just cause or excuse, even in the absence of personal hatred, spite, or ill-will.” Id. at 87 (citations omitted).

In a recent case, In re Alessi, Judge Bucki held that the deliberate failure to abide by the terms of the contract, amounted to willful and malicious injury. In Alessi, the debtor, Mrs. Alessi, not only failed to pay a debt, but a failure to pay from funds that the debtor had agreed specifically to earmark for that purpose. The uncontroverted facts showed that the funds resulting from a real estate transaction were accessible and not otherwise encumbered, that the debtor knew of her obligation to turnover the funds, and that through his counsel, Mr. Alessi made timely demand for payment, even though not obligated to do so. The resulting injury was willful, in that Ms. Alessi deliberately and intentionally refused to turn over the sale proceeds. By violating a contractual provision for use of committed funds, Amy Alessi inflicted a wrongful financial loss without just cause or excuse. Hence, she caused an injury that was malicious within the meaning of section 523(a)(6).

Thus, if you are a debtor, you may have an obligation to follow through on the contracts where the funds are specifically designated for a given purpose. If you fail to do so, you may be denied a discharge.

Student Loans Guaranteed By Parent and Bankruptcy

Recently I have been seeing a lot of debtors who have guaranteed their children’s student loans. When I am asked whether I can do something about those loans in Chapter 7 or Chapter 13 bankruptcy, my usual answer is no. The reason for this is that the government guaranteed student loans are not dischargeable in bankruptcy, except in extreme hardship situations, regardless of whether the borrower is the student or the parent who guaranteed the loan. Unfortunately, it is not uncommon for the student to default on the loan. In those situations, the full weight of the loan will have to be carried by the parent who guaranteed the loan. If the parent is already having difficulties paying his/her bills, this may be the final straw to push the debtor into bankruptcy.

When the debtor tells about this situation, I, as a bankruptcy lawyer cannot offer much help. Since the bankruptcy court here in Rochester has taken a position that in Chapter 13 bankruptcy the student loans will be paid, along with other unsecured creditors, pro rata, even a five year repayment plan might not reduce the loan significantly. In Chapter 7, the student loan would not be dischargeable.

As much as it pains me to say it, it is a bad idea for a parent to cosign a government guaranteed student loan. Further, parents guaranteeing the loans of their children face having student loans risk as they approach retirement. If the repayment of the loan is deferred by the student, this will keep the parents exposed to the debt until it is repaid, sometimes decades later. It entwines the two generations financially long after the student is an adult. If the parent is approaching retirement, it is not likely that the parent would have the money to pay off student loans.

Discharging Income Taxes in Bankruptcy

There are four general requirements for discharging an income tax in bankruptcy. Initially, the tax must be one for which the return was not last due within three years of the filing of the bankruptcy. Therefore, if a 2006 income tax return was last due on April 15, 2007, the three-year requirement would be met after April 15, 2010.

The “last due” requirement may be complicated by the debtor’s actions. If the debtor requests and receives an extension, the three-year clock starts after the last extension. See In re Wood, 866 F.2d 1367 (11th Cir. 1989). The three-year period is also tolled during the time when the taxing authority is barred from collecting the debt because of a prior bankruptcy.

The second requirement is known as the 240-day rule. For an income tax to be dischargeable, it must not have been assessed with 240 days of the filing of the bankruptcy. When a tax is assessed is sometimes complicated and depends on the practices of the federal or state taxing authority. For federal taxes, the I.R.S. regulations state that “the date of the assessment is the date the summary record is signed by an assessment officer.” This is not the same time as when the return is filed. However, when a return is timely filed, the assessment date is usually around the time a return is filed.

A debtor will know that a tax has been assessed when they are notified by the taxing authority of the tax claim. The exact date of assessment of a federal tax can be obtain by requesting and analyzing a debtor’s tax transcript.

Another related requirement is that, to be discharged in a bankruptcy, an income must not be not yet assessed but be assessable at the time that the bankruptcy is filed. Pursuant to 26 U.S.C. § 6501(a), tax liability must be assessed within “three years after the return was filed….” Therefore, even if a tax has not yet been assessed for some reason at the time a bankruptcy case is filed, and the case postdates the applicable return by three years, this requirement for dischargeability will met.

The third requirement relates to the timing of when the return is filed. If a return is filed late, it cannot not be filed within two years of a bankruptcy for the tax to be discharged. Under this rule, amended returns are treated as original filed returns. Also, if the debtor provides to the IRS with correspondence containing financial statements with all the information needed to complete a return, this can also be deemed to be a return. The two-year period begins once the taxing authority actually receives the return, and not when the return is mailed, as is the case with timely-filed returns.

The final requirement is the following. The return must be filed. A substitute return filed by a taxing authority on behalf of a taxpayer is not considered a return for these purposes. There is, however, a split of authority on whether a return filed by a debtor after a substitute return is filed can is considered a return for this test. The return must not be fraudulent and the debtor must not have attempted to evade the tax.

Tax evasion is generally rare and courts disagree on what is deemed to constitute tax evasion for purposes of this test. Tax evasion is found usually in situations where a debtor is hiding assets, constructing complicated transactions for tax purposes, or making false and misleading statements to avoid tax. However, evasion has also been found to exist in some cases in which a debtor has simply not paid a tax while having the ability to do so.

If you have pending tax liabilities, and you believe that you can satisfy all or some of the above requirements, you should meet with a bankruptcy lawyer to determine whether a Chapter 7 bankruptcy will result in a discharge of some or all of your tax liabilities.