Dischargeability – Page 4 – Rochester Bankruptcy and Debt Relief

Failure to Disclose Assets in Bankruptcy, Confirmation of Chapter 13 Plan and Revocation of Confirmation Order

What happens if the debtors fail to disclose certain assets in their Chapter 13 bankruptcy and those assets come to light after the confirmation of their Chapter 13 plan? This situation was recently addressed by Judge Ninfo of the United States Bankruptcy Court for the Western District of New York in In re Cram.

On March 24, 2004, Richard and Pamela S. Cram filed a petition in Rochester, in the United States Bankruptcy Court for the Western District of New York, initiating a Chapter 13 case. A Chapter 13 trustee was appointed. On their Schedule B of Personal Property, the debtors stated that they had no “[o]ther contingent and unliquidated claims of [any] nature….”. On April 30, 2004, the court orally confirmed their Chapter 13 Plan, and on October 5, 2004 an order confirming the plan was entered.

At the time the bankruptcy was filed, the debtors had a pending medical malpractice claim which resulted a subsequent lawsuit. On June 14, 2005, the debtors’ lawyer filed an amendment to their Schedule B of Personal Property, which amended the answer to question No. 20 regarding contingent and unliquidated claims, but did not amend their Schedule C to claim any proceeds that might be received from the malpractice claim as exempt.

Between June 14, 2005 and April 7, 2008 the debtors or their attorneys did not notify the court of the existence of the pre-petition medical malpractice claim set forth in the amendment, which was a Section 541 asset of the estate at the time the court confirmed their plan, even though in confirming their plan pursuant to Section 1325(a), the court believed that the requirement of Section 1325(a)(4), that the creditors would receive at least as much under the plan that they would in a Chapter 7 liquidation.

Section 1325(a)(4) provides that:

(a) Except as provided in subsection (b), the court shall confirm a plan if—
(4) the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date[.] 11 U.S.C. § 1325 (2009).

This section is known as “the best interests test”.

Once the trustee learned of the settlement, he moved to revoke the discharge, as well as for other relief. He asserted that on April 28, 2008, after the discharge order had been entered on April 7, 2008, the trustee learned that the claim had been settled on or about February 20, 2008 for $125,000 and that neither the debtors, their bankruptcy attorneys nor their personal injury attorney ever notified the trustee of the settlement or any prior settlement offers. The trustee argued, inter alia, that in view of the settlement, the debtors’ confirmed plan did not meet the best interests test.

Unlike in Chapter 7 cases, the court, in confirming a plan in a Chapter 13 case, makes an affirmative determination, as required by Section 1325(a), that, among other things, the plan meets the best interests test. Judge Ninfo held that because of the debtors’ failure to disclose the malpractice claim, which was a Section 541 pre-petition asset of the estate, either at the time of the oral confirmation of their plan or when the confirmation order was entered, the plan did not meet the best interests test, and neither the debtors, nor the trustee, ever corrected that failure by taking the necessary steps to insure that the plan was amended to include the proceeds of any recovery on the malpractice claim, either before or after the settlement. Thus, the confirmation order had to be vacated, and with no confirmed plan completed, the debtors would not be entitled to a Section 1328 discharge and the court vacated the confirmation order pursuant to Section 105(a).

Judge Ninfo further held that when the debtors filed the amendment to include the malpractice claim, they, as debtors, and their bankruptcy attorneys, as officers of the court, had an affirmative obligation to advise the court, not simply the trustee or their creditors, of the undisclosed asset, so that the court would be aware that its confirmation of the plan was improper and its confirmation order incorrectly entered, and could insure that the confirmation order was vacated or a proper modification to the plan filed to include any recovery.

The court further granted trustee’s motion to dismiss the bankruptcy, unless prior to July 6, 2009, the debtors: (a) pay to the trustee the amount necessary for the trustee to make a distribution to their unsecured creditors of 100% plus 9%; or (b) otherwise make arrangements with the trustee for the payment of the necessary amount within a reasonable period of time that is acceptable to the trustee and the trustee files with the court the details of such an acceptable arrangement.

The lesson of this case is that the debtors and their bankruptcy lawyers have an affirmative obligation to disclose any and all assets of the debtors, including any contingent or unliquidated claims. In this case, the consequences to the debtors could have been much more severe.

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 attorney.

Removing Judgments After the Bankruptcy

If a creditor obtains a judgment against a debtor, that judgment, if filed, becomes a lien against any real property owned by the debtor. Any such judgment lien against real property can be removed from the property, if the lien impairs an exemption you claim in your bankruptcy. In New York State, you can only remove a judgment lien against your personal residence. Debtor’s bankruptcy attorney usually files a motion pursuant to section 522(f) of the Bankruptcy Code. A typical motion includes a number of attachments such as a copy of the deed, mortgage, current mortgage statement, a recent appraisal of the property, and copies of the judgment filed in the local County Clerk’s office.

Typically, the debtor is faced with the following situation. The debtor owns a home with the total equity of less that New York’s homestead exemption, which is currently $50,000 for a single debtor and $100,000 for a married couple filing jointly. What a $50,000 homestead exemption means is that the debtor can have up to $50,000 of equity in the residence ($100,000 for a married couple) and your home will not be taken or threatened by the bankruptcy trustee or other creditors. If there are judgments against the debtor, they are viewed as impairing debtor’s exemption in the property and gives the debtor the right to remove them.

If you do not own a residence when you file your bankruptcy, you do not need to set aside the judgment in the County Clerk’s office, but the underlying debts are discharged regardless whether the judgment is removed. This may become a a problem if you purchase (or inherit) real property after your bankruptcy. In that situation, even though there is no actual lien against the newly acquired property, it may appear that there is to someone searching the Clerk’s office. This is because they will see a judgment against you, and they will see that you own the property. Without knowing about the intervening bankruptcy and the discharge of the debt that underlies the judgment, they could draw the conclusion that the judgment was in fact a lien against the property.

The problem often surfaces if there comes a time that you want to borrow against, or refinance the property. Most lenders are sophisticated enough to recognize that any pre-bankruptcy judgments are usually discharged and a typical judgment search, or a title search, in Monroe County will include a check of the Bankruptcy Court’s records. It is also the reason to keep a copy of your discharge after the bankruptcy so that the lender can have easy verification that the bankruptcy resulted in a discharge.

If you are dealing with debt problems in Rochester, New York; 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 attorney.

Chapter 7 Bankruptcy and Objections to Discharge

You have filed a Chapter 7 bankruptcy. You and your lawyer went to the meeting of the creditors. Everything seemed to be in order. Then your lawyer calls you, and tells you that one of your creditors has filed an adversary proceeding in your Chapter 7 case, objecting to discharge of its debt. So what exactly is taking place?

If a creditor determines that an objection with respect to discharge of its debt is warranted, the creditor will file an Objection to Discharge of its particular debt. This filing begins what is known as an adversarial proceeding in the bankruptcy court. An adversarial proceeding is simply a law suit within the bankruptcy, seeking to declare a particular debt as non-dischargeable. The debtor responds to the complaint, evidence is gathered and supplied to both sides, and a hearing is held in front of the bankruptcy judge who decides the case. Here in Rochester, Hon. John C. Ninfo, II, would hear the case. Typically, neither the bankruptcy trustee nor the U.S. Trustee are involved in the adversarial proceeding.

A creditor may object to the discharge of its debt in a number of different situations. An unsecured creditor may object using Section 523(a)(2) of the Bankruptcy Code, which contains several different types of non-dischargeable debt. The debt under that section may not be dischargeable because it is: (1) $500 owing to a single creditor for the purchase of “luxury” goods within 90 days prior to filing of the bankruptcy; (2) $750 owing to a single creditor for a cash advance (i.e. balance transfers are cash advances) obtained within 70 days prior to filing of the bankruptcy; or (3) for money obtained under false pretenses, false representation, or actual fraud. There are also additional reasons to declare a debt non-dischargeable.

With respect to situations (1) and (2), the applicable rules are known as as the per-se rules. That means that the creditor need not prove debtor’s intent (i.e. fraud), and needs to show only that the transactions meet the criteria stated. Situation (3) means that the debtor made the charges/cash advances knowing that he/she was going to file bankruptcy, or made the charges/cash advances while insolvent and/or could not have had a reasonable expectation to pay back the debt, or made false representations in obtaining credit resulting in the debt he/she is trying to discharge at this time.

If the creditor is successful in having a debt declared non-dischargeable, the debtor will owe that debt until it is paid, with all accumulating interest, and the debtor can never discharge that debt.

The following is a brief description of procedural issues applicable to the objections. The complaint must be filed on or before 60 days from the first date set for the creditors meeting (also know as 341 meeting). Typically, a creditor has less than 90 days after receiving notice of the bankruptcy case to file a complaint. A creditor must act promptly to determine there are grounds to object to discharge.

Even if a creditor files an objection to discharge of its debt, the rest of the bankruptcy will proceed normally. The debtor will recieve the discharge on time, and most of the time, the discharge will be received before the hearing in the adversarial proceeding.

Once the adversarial proceeding is filed, the debtor has a number of options with respect to the creditor’s claim. The debtor can agree to repay all or a portion of the debt by signing a reaffirmation agreement. A typical reaffirmation agreement results in the debtor paying 50% of the debt over 12-18 months. The next option is fighting the objection. The debtor will have to be able to either fight the objection on his/her own or pay an additional retainer to the attorney to fight the claim.

The way that a creditor proves its case, is by showing to the court that the debtor was in financial distress at the time the objectionable transactions were made. Therefore, the debtor’s financial history will be disclosed through the discovery process, usually for a period of 12 months prior to the challenged transaction, and from the date of the transaction to the date of filing. Since an adversarial proceeding is a civil matter, both parties may call witnesses, and the debtor may be called to testify by either side. A creditor’s theory of the case in an adversarial proceeding is usually that no reasonable person could have expected to be able to pay off the debt, at the time that debt was taken out.

If the creditor wins, a judgment is entered, declaring the debt non-dischargable. This judgment can ultimately be used in New York State court, or elsewhere, to obtain a money judgment that can then be used to garnish wages, restrain bank accounts or conduct other collection activities. That judgment will not be dischargeable in any subsequent bankrupcies and can only be extinguished by payment or by New York’s statute of limitations, presently 20 years. Even if the creditor prevails, the debtor is not responsible for the creditor’s attorney’s fees and costs.

If the debtor wins, the debt is discharged, and, under appropriate circumstances, the creditor will have to pay debtor’s attorney’s fees and costs.

Thus, if an adversarial proceeding is brought, the debtor must choose between either settling or fighting. The cost to defend an adversarial proceding is usually substantial. Therefore, it should be compared to the cost of settling the case. If the proposed settlement reduces the debt and the payments are affordable, especially if the settlement amount is less than the cost to defend, the debtor should consider settlement.

If you are dealing with debt problems in Rochester, New York, 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.

Bankruptcy Basics – Domestic Support Obligations

On occasion, a divorce may result in one or both of the parties filing for bankruptcy, often without an adequate understanding of the limited relief available in the bankruptcy court. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (”BAPCPA”) directly addressed issues related to the dischargeability of marital debt and support obligations, as well as to the effect of the automatic stay on collection and enforcement proceedings out of divorce and family law litigation. Under BAPCPA, domestic support obligations (usually alimony, child support and property distribution) are given priority over almost every other creditor.

Under bankruptcy law, a “domestic support obligation” is any debt incurred before or after a bankruptcy filing that is owed to or recoverable by a spouse, former spouse, child or governmental unit; in the nature of alimony, maintenance or support; and established pursuant to the terms of a divorce decree, separation agreement, property settlement agreement, court order or administrative determination.

In Chapter 7 bankruptcy, essentially all marital and domestic relations obligations are not dischargeable, regardless of whether they are support in nature, property divisions or “hold harmless” agreements, provided they were incurred by the debtor in the course of a matrimonial proceeding or a divorce action which resulted in a separation agreement, divorce decree, court order or administrative determination.

A debtor’s obligation to pay marital debts directly to a third party ( ie., pay the mortgage on former marital residence) and to hold the former spouse harmless on said debts is also deemed to be non-dischargeable if the obligation has the effect of providing support to the former spouse. A debtor’s duty to pay the following expenses are usually deemed to be in the nature of support and not dischargeable: educational expenses of a minor child; medical insurance coverage for a minor child; and life insurance, with the minor children as beneficiaries.

Attorney’s fees owed by debtor to his own lawyer are clearly dischargeable in bankruptcy, but as a general rule, attorney’s fees owed by debtor to a former spouse’s attorney are not dischargeable, if the underlying legal proceeding resulted in the entry of an order or judgment directing payment of maintenance or spousal support to the former spouse.

The division of a debtor’s pension benefits during the divorce action is usually accomplished by entering a Qualified Domestic Relations Order (”QDRO”). Since division of a pension is considered to be a transfer by debtor of a present interest in his pension, and as such, it is not a debt that can be discharged in bankruptcy.

If there are assets in a Chapter 7 bankruptcy, and you owe any domestic support obligations (alimony, child support, that sort of thing) to your spouse, former spouse or child, the trustee will pay that first. Next, the trustee will pay any domestic support obligation owed to a governmental unit.

In Chapter 13 bankruptcy, past due domestic support obligations owed by a debtor are not dischargeable, unless they are paid in full over the life of the Chapter 13 plan. However, if a debt created by a separation agreement or judgment of divorce is not in the nature of support, it sometimes can be discharged in Chapter 13 without being paid in full.

For a Chapter 13 Plan to be confirmed by the Bankruptcy Court, it must: pay in full to the former spouse all domestic support obligations owed by debtor at the time of the bankruptcy filing, and the debtor must be current on all domestic support obligations incurred after the bankruptcy filing. Past due support obligations are generally required to be paid in full through the debtor’s plan but an exception can be made if the creditor agrees. Support debts have a first priority, meaning they are paid before other kinds of priority debts, like taxes.

A Chapter 13 Plan, even if confirmed by the bankruptcy court, is subject to dismissal if the debtor fails to pay any post-petition or post-confirmation domestic support obligations, and a Chapter 13 discharge will not be entered by the bankruptcy court unless and until a debtor certifies that all domestic support obligations have been paid and that the debtor is current on such obligations.

The automatic stay created by a bankruptcy filing bars the commencement or continuation of most legal proceedings, but it has no effect on a proceeding to establish paternity; to establish or modify a child support order, determine child custody or visitation issues, or dissolve a marriage, except to the extent that such proceeding may seek to determine a division of marital property in which the bankruptcy estate also has an interest. In those situations, the divorce can be granted without first obtaining relief from the automatic stay, but the marital property cannot be divided without obtaining such relief.

The automatic stay also does not prevent the post-petition collection of domestic support obligations such as alimony or child support from any property belonging to the debtor, providing that the bankruptcy estate does not also have an interest in the same property; from automatic wage deduction orders created by a statute or judicial or administrative order; from the interception of debtor’s federal or state income tax refunds, or
from the withholding, suspension or restriction of a debtor’s driver’s license or professional or occupational license. Therefore, Bankruptcy Court does not offer much protection for someone seeking to avoid the domestic support obligations.

The above rules will apply to the proceedings in New York State courts. In Ross v. Sperow, 57 A.D.3d 1255 (3rd Dept. 2008), the Appellate Division had to address a situation where one of the parties was seeking to enforce a counsel fee award after the other party filed for bankruptcy. In Ross, multiple violation petitions had been filed by the parties over the course of several years. In August 2006, Family Court upheld mother’s motion for attorneys fees and directed father to pay $5,000 of the mother’s attorneys fees. Father filed for a Chapter 7 bankruptcy thereafter, and listed the award of attorneys fees as an unsecured debt. Father’s bankruptcy was discharged in January 2007. Mother brought a violation petition which alleged that father failed to pay the attorneys fees. Father moved to dismiss petition on ground that he discharged counsel fee award in bankruptcy. The Appellate Division stated that state and federal courts have concurrent jurisdiction over issue of dischargabilityof a particular debt and held that domestic support obligations in the nature of support are exempt from discharge in bankruptcy. While father contended that counsel fees incurred were for custody and visitation proceeding, the record reveals that mother’s initial petition commencing the proceeding raised issues of financial need and hardship. According to the Appellate Division, term “in the nature of support” is broadly interpreted in the context of discharge of debt obligations in bankruptcy and held that the award of counsel fees was in part in the nature of support, and as such, exempt from discharge in bankruptcy.

It is very important for your bankruptcy lawyer to be aware of any outstanding domestic support obligations if you are filing for bankruptcy. Here in Rochester, bankruptcy trustees routinely ask during the meeting of creditors (also known as 341 meeting), if the debtor has a domestic support obligation. If there is a domestic support obligation, the bankruptcy trustee will want to know to whom such obligation is payable, will ask the debtor to provide the claimant’s address and telephone number, and will inquire if the debtor is current on his or her post-petition domestic support obligations.