Rochester Bankruptcy and Debt Relief

I have previously written about the requirements that a debtor must meet in order to file for Chapter 7 Bankruptcy.  As long as the debtor is able to meet the means test and disposable income test, the debtor can file for Chapter 7 Bankruptcy. However, there are a number of conditions that would disqualify a debtor from filing Chapter 7 Bankruptcy. The following post will address those conditions.

Generally, any debtor who is qualified to file and complete a Chapter 7 Bankruptcy case is eligible for a Chapter 7 Bankruptcy Discharge, unless the debtor falls into one or more of the following categories:

A person who has been granted a discharge in a Chapter 7 Bankruptcy case that was filed within the last 8 years.  This limitation prevents debtor from filing another Chapter 7 Bankruptcy case despite meeting all other qualifications.  The bankruptcy petition specifically asks debtors regarding any prior bankruptcy filings.

A person who has been granted a discharge in a Chapter 13 Bankruptcy case that was filed within the last 6 years, unless 70% or more of the debtor’s unsecured claims were paid off in the Chapter 13 Bankruptcy case. Therefore, if the debtor’s Chapter 13 Bankruptcy case paid less than 70% of the unsecured claims, the debtor is limited to filing Chapter 13 Bankruptcy within the 6 year period.

A person who files and obtains court approval of a written waiver of discharge in the Chapter 7 Bankruptcy case.

A person who conceals, transfers, or destroys his or her property with the intent to defraud his or her creditors or the trustee in the Chapter 7 Bankruptcy case. This relates to the provisions denying discharge to the debtor who committed that type of conduct.

A person who conceals, destroys, or falsifies records of his or her financial condition or business transactions.

A person who makes false statements or claims in the Chapter 7 case, or who withholds recorded information from the trustee.

A person who files to satisfactorily explain any loss or deficiency of his or her assets.

A person who refuses to answer questions or obey orders of the bankruptcy court, either in his or her bankruptcy case or in the bankruptcy case of a relative, business associate, or corporation with which he or she is associated.

A person who, after filing the case, fails to complete an instructional course on personal financial management. This is the reason that it is critical for the debtor to complete the course within 45 days of the meeting of the creditors.

A person who has been convicted of bankruptcy fraud or who owes a debt arising from a securities law violation.

If the debtor meets on or more of the above conditions, he is not eligible for a Chapter 7 Bankruptcy discharge and should not file a Chapter 7 Bankruptcy.

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.

One question that I am often asked is whether the unsecured second or third mortgage on the property owned by the debtor can be stripped in Chapter 7 Bankruptcy.  In Chapter 13 Bankruptcy, the unsecured second mortgage can be stripped by bringing a Ponds motion.

Unfortunately, in Chapter 7 Bankruptcy, the unsecured second or third mortgage cannot be stripped.  In a recent decision which also applies to the bankruptcy cases in Rochester, New York,  In re Grano, the Buffalo Bankruptcy Judge Bucki held that in Chapter 7 Bankruptcy cases, the debtors cannot avoid wholly unsecured second or third mortgages.

Joseph and Ann Grano owned a residence in the Town of Amherst, New York.  After filing a Chapter 7 Bankruptcy petition, they commenced the adversary proceeding against Wells Fargo Bank, N.A., to avoid a second mortgage.  In their complaint, they alleged that their real estate has a current fair market value of $445,000 and that it is encumbered by two mortgages: a first lien with an outstanding principal balance of $511,000, and the second mortgage of Wells Fargo with a balance of $95,837.60.

Granos asserted that they can avoid the second mortgage pursuant to the authority of 11 U.S.C. § 506(a) and (d).  In lieu of an answer, Wells Fargo moved to dismiss the complaint for failure to state a cause of action.  In relevant part, section 506(a)(1) of the Bankruptcy Code states that “[a]n allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property . . . and is an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim.” Asserting that the first mortgage secures a debt greater than the value of the property, the debtors argue that in its status as a second mortgagee, Wells Fargo retains only an unsecured claim.  Subject to exceptions not here present, 11 U.S.C. § 506(d) states that “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” In reliance upon this later subdivision, the debtors commenced their  adversary proceeding to avoid the second mortgage of Wells Fargo.

In Dewsnup, the Supreme Court accepted the position of the secured creditor, that “the words ‘allowed secured claim’ in §506(d) need not be read as an indivisible term of art defined by reference to § 506(a).”  Instead, the language of section 506(d) “should be read term-by-term to refer to any claim that is, first, allowed, and, second, secured.  Because there is no question that the claim at issue here has been ‘allowed’ pursuant to §502 of the Code and is secured by a lien with recourse to the underlying collateral, it does not come within the scope of §506(d), which voids only liens  corresponding to claims that have not been allowed and secured.” 502 U.S.at 415.  Effectively, therefore, the Supreme Court refused to recognize section 506(d) as a grant of authority to a debtor in Chapter 7 to “strip-down” or cancel the lien of an undersecured mortgage.

In contrast to Chapter 7, debtors in Chapter 13 may assert rights under special statutory provisions for the treatment of secured claims.  Specifically, 11 U.S.C. § 1322(b)(2) provides that a Chapter 13 plan may “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.” InNobelman v. American Savings Bank, 508 U.S. 324 (1993), the Supreme Court held that the language of section 1322(b)(2) precluded the bifurcation of an undersecured homestead mortgage into secured and unsecured claims. Consequently, to the extent that a homestead has value to collateralize any portion of a mortgage, a chapter 13 plan must treat that lien as fully secured.  However, in In re Pond, 252 F.3d 122 (2001), the Second Circuit distinguished those circumstances where the homestead lacks equity to collateralize any portion of an inferior lien. In this special circumstance, because the lien is wholly unsecured, the debtors “are not ‘holders of . . . a claim secured only by a security interest in . . . the debtor’s principal residence,’ 11 U.S.C. § 1322(b)(2), and their rights in the lien are not protected under the antimodification exception of Section 1322(b)(2).” 252 F.3d at 127.

In the present instance, Mr. and Mrs. Grano contended that this court should adopt for Chapter 7 the same exception that the Second Circuit has recognized for cases in Chapter 13, to the effect of permitting the avoidance of secondary liens that are totally undercollateralized. Unfortunately, this argument overlooks the unique statutory predicate of Chapter 13.  In allowing a debtor in Chapter 13 to avoid a fully unsecured homestead mortgage, the decision in In re Pond utilized the authority of 11 U.S.C. § 1322(b)(2). No parallel provision applies in Chapter 7.  The court concluded that notwithstanding the absence of equity beyond superior liens, the debtors may not avoid the second mortgage of Wells Fargo Bank, N.A.

This decision forces the debtors and their bankruptcy lawyer to engage in a cost benefit analysis in a situation where there is a wholly unsecured second or mortgage.  Assuming the debtors can file either Chapter 7 or Chapter 13 Bankruptcy, the benefit of filing Chapter 7 Bankruptcy and discharging all unsecured debt, should be compared to the benefit of a Chapter 13 Bankruptcy plan payments over 5 years, and a likely discharge of the unsecured second or third mortgage.  Assuming the debtors wish to retain their residence, the comparison of two figures should point them in the right direction.

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.

If you are contemplating filing Chapter 7 or Chapter 13 bankruptcy, you should stop using your credit cards.  Once you’ve decided to file for bankruptcy, any credit card use after that point will be highly scrutinized by both the credit card issuer and the bankruptcy trustee, and is likely to be viewed with a great deal of suspicion.  The reasons for this are obvious.  If the debtor decides that he is seeking to eliminate his credit card debt through Chapter 7 bankruptcy, or pay a lesser amount though a Chapter 13 filing, then incurring additional credit card debt can be considered fraudulent.  Specifically, the credit card issuer will make an argument that the additional debt was incurred without intention to repay, then the discharge can be objected to. Also, the issuer will also look at all of the transactions to verify that the money was not spent on such things as vacation trips, or that other unnecessary spending didn’t take place.  If a credit card issuer learns that a debtor used a card without any intention of making full payment, then the credit card company has the right to object to the debtor’s discharge of that particular debt.

Also, if the bankruptcy trustee, or United States Trustee, learn that the debtor intentionally ran up his credit cards before filing, then either trustee can seek to have the debtor’s discharge denied or move to have the case dismissed.  There is also the possibility that the debtor can be found to have engaged in bankruptcy fraud, which is a criminal offense.

While consumer Chapter 7 bankruptcy allows the debtor to eliminate all credit card debts and get a fresh new financial start, the debtor should not jeopardize his ability to seek bankruptcy protection by engaging in self-serving or foolish behavior.  There is simply no reason to create problems for the upcoming bankruptcy filing.  Therefore, don’t use your credit cards once you’ve decided to file bankruptcy.

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 New York bankruptcy lawyer.

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.

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.

If you file a Chapter 7 bankruptcy, what happens if you have a pending workers’ compensation claim?  Generally, if you file for bankruptcy in New York, any money received as certain public benefits is usually exempt.  However, workers’ compensation claims can result in significant lump-sum awards and a bankruptcy trustee may file an objection to the debtor claiming such award as exempt.

Here in Rochester, Judge Ninfo dealt with a similar situation in In re Herald, and his decision resolved these issues in Western New York. In order to resolve this issue in favor of the debtor, Judge Ninfo had to find that worker’s compensation award fell within the scope of §282.2(c) of New York’s Debtor Creditor Law, which exempts benefits received as a result of “disability, illness or unemployment benefit.”

After analyzing the legislative history of §282 of New York’s Debtor Creditor Law, Judge Ninfo concluded that the legislative intent was to exempt workers’ compensation proceeds.  He further noted that in some situations this may give a debtor a head start, as opposed to a fresh start,  where the debtor will receive a significant award after the bankruptcy filing, but found that any such award to be exempt nonetheless.

Thus, if you have a workers’ compensation case pending or your are receiving worker’s compensation payments, you can file a Chapter 7 bankruptcy and keep the award when you receive it.  It is important to tell your bankruptcy lawyer about it in advance, so that the workers’ compensation claim is listed as exempt on your bankruptcy petition.

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.

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.